Option writing/shorting is the act of selling either calls or puts first, hoping that the value goes to zero or buy it back at a lower price to earn a profit.

Trading in index options has been surging over the last few years, accounting for almost 75% of the total derivative market turnover on NSE in 2012-13. Most retail traders usually buy options, i.e., buy calls if the bet is that the market will go up or buy puts if going down. The idea behind this post is to explain the basics on option writing/shorting, and how including them in trading can improve the odds of winning.

We use the words option writing/shorting and not option selling, to signify that the options were sold first before being bought. Selling options is used when exiting options that were already bought.

Why Short/Write Options

Here is some food for thought, between 70 to 95% of all options usually expire worthless. What this means is that by buying an option (calls or puts) the odds of losing are significantly more. Now the question is if options buyers are inherently taking a higher risk, who is on the other side of the trade with better odds of winning? The answer is “Option Writers”. Let me explain with a basic introduction to what comprises option premium, different types of options, open interest and an example showing how most options expire worthless.

Option Premium

Option premium, the value of calls or puts that you see on your trading screen has two components, Intrinsic value, and time value.

Premium = Intrinsic Value + Time value

Intrinsic value

Intrinsic value is how much the option is in the money, or simply how much you would get if the options were to expire right now.

If Nifty is at 6100, Intrinsic value of 6000 Nifty calls is 100 (6100 – 6000) which is how much you would get if the option expired right now.

If Nifty is at 6100, Intrinsic value of 6200 Nifty calls is 0, since it is out of the money which is how much you would get if the option expired right now.

Similarly if Nifty is at 5900, Intrinsic value of 6000 puts is 100 and 5800 puts is 0.

Time value

Time value is the portion of premium which is over and above the intrinsic value of an option, i.e., Time Value = Premium – Intrinsic value

Different types of options

ITM (In the money), all options which have some intrinsic value. So if Nifty is at 6240, 6100 calls, 6300 puts, 6400 puts, etc. are ITM.

OTM (Out of the money), all options which have no intrinsic value and only time value. So if Nifty is at 6240, 6300 calls, 6400 calls, 6100 puts, etc. are OTM.

ATM (At the money), all options with strike price very close to the market price. So if Nifty is at 6210, 6200 calls and 6200 puts are ATM.

Open Interest (OI)

The total number of open contracts for any option is called its Open Interest. So if Nifty 6200 Jan 2014 calls have OI of 30 lakh, that means all buyers of 6200 calls together hold 30 lakh contracts sold to them by option writers.

Example

Here is OI data collected for 8th Jan 2014 from the NSE website for both calls and puts for 9 most active strike prices on Nifty.

Nifty OI data for 8th Jan 2014

In the example above if Nifty were to expire today at 6200, the total options that would expire worthless would be : 39295000 (15102150 + 3150000 + 4235750 + 16807100) which is around 83% of the total OI of all calls and puts combined.

Yes, an option buyer can take quick intraday trades for a profit, or be on the right side of the market and have the potential of making unlimited profits, but the odds of winning are always in favor of an option writer who benefits with majority of options expiring worthless.

The underlying reason for this is because of the time value component of the option premium (Premium = Intrinsic Value + Time Value). A buyer of an option is continuously fighting time because if the trade doesn’t go in his favor immediately, the time to expiry keeps reducing(time value), and hence the premium itself. An option writer on the other side has time as his advantage, once in a trade as long as the market (intrinsic value) doesn’t move against him the time value keeps reducing, increasing his odds of winning over an option buyer.

Option Writing – Risks

An option buyer has limited risk and unlimited profit potential, so if 1 lot of 6300 Nifty call was bought at Rs 100, the maximum loss on this trade is the Rs 5000 (Rs 100 x 50), and if Nifty went to 7300 the call would make a profit of Rs 45,000.

An option writer has unlimited risk and limited profit potential.

When you write an option, say 1 lot of 6300 calls at Rs 100, Rs 5000 (Rs 100 x 50) which is the premium paid by the buyer is credited to your trading account and this Rs 100 on the premium is your maximum profit potential. After taking this trade if

Nifty is 6200 on expiry, value of 6300 calls on expiry is 0, and you get to keep the entire Rs 5000.

Nifty is 6300 on expiry, value of 6300 calls is still 0, and you get to keep the entire Rs 5000.

Nifty is 6350 on expiry, value of 6300 calls would be 50, you have to give back Rs 2500( Rs 50 x 50) on expiry, but still earning you a profit of Rs 2500.

Nifty is 6400 on expiry, value of 6300 calls would be 100, you would have to give the entire Rs 5000, no profit no loss.

Nifty is 6500 on expiry, Value of 6300 calls would be 200, you would have to give back Rs 10,000 whereas you had received only Rs 5000, causing you a net loss of Rs 5000.

Nifty is 7500 on expiry, Value of 6300 calls would be 1200, you would have to give back Rs 60,000 whereas you had received only Rs 5000, a net loss of Rs 55000.

Since the potential losses are unlimited, it is best as a beginner option writer to be conservative, and allocate only a small portion of your trading capital when starting off.

Option Writing – Margins

Since the risk is unlimited for an option writer, the exchange blocks margin and similar to futures is marked to market at the end of every day. So to buy an option at Rs 100, you need to have only Rs 5000 ( Rs 100 x 50), but to write an option you will need around Rs 25,000 which is marked to market daily, which means that if there is a loss you are asked to bring in those funds to your trading account by end of the day.

Option writing margin requirement varies for every contract, and as on today Zerodha is the only brokerage in India to offer a web based SPAN tool that lets you calculate this.

Example

You have a bearish view of the market and Nifty is presently at 6172. You decide to write/short 6200 Jan 2014 calls at 90 expecting to profit if the value comes down below 90 on the premium.

This is just an introduction for traders looking to start off on option writing, exercise caution, and once you are clear with the concepts look at combining short options with stocks, futures, or other long options, to create positions that can increase the odds of winning while trading considerably.

Founder & CEO @ Zerodha, team working towards breaking all barriers that I personally faced as a retail trader for over a decade. Love playing poker, basketball, and guitar. Getting body fat % in single digit is the next personal endeavor :) .

Sir i have a question …say i wrote an call option and have the premium of say 6000 in my account on say 21 dec,(expiry is on 29 dec) than suppose things doesn’t go my way and market starts falling and the written call option is avalable (26 dec) at rs 3000 …then can i exit my position on 26th dec …before expiry…taking that 3000 rs profit

How we calculate vix for a stock like Infosys, Last time( 11 October 2012-Result Day) I observed that Option prices increased from 6 October to 10 October, this time prices decreased from 6 Jan o 10 Jan.

Dr Sir
I a little confused on This point
Nifty is 6200 on expiry, value of 6300 calls on expiry is 0, and you get to keep the entire Rs 5000.
Nifty is 6300 on expiry, value of 6300 calls is still 0, and you get to keep the entire Rs 5000.
Did You mean no profit no loss ? or What ?

I sold graphite india 4 shate @₹320/-, without i have in my account. In mis at 14:00 pm, 15/09/2017
I wanted to buy at market rate at 15:00pm, 15/09/2017,
But i have not allotted such share, precess pending,, then what is next….

I understand that margin is required when one writes the naked option and has to arrange MTM funds. A question in my mind for a long time is, when one takes a debit spread, say long 6200 call and short 6400 call, the maximum the person looses is the difference in premium which was already paid. In such a case why should a margin be collected, though the margin is less than naked option writing? Is it not sufficient to block selling the long option alone before covering the short option?

The margins blocked are as per the exchange requirements, and yes the Indian exchanges are extra stringent about this.
Coming to your example, Long 6200 call and Short 6400 call, and assume only Rs 10,000 is blocked for this(the buy premium). what happens if Market bounces up, 6200 calls have 0 liquidity, and 6400 calls positions are making a huge loss? Yes the scenario is unlikely, but possible.
I guess the only way such spreads will become popular is if NSE starts letting people trade the spreads directly itself, similar to calendar spreads. Check the 1st image on this blog, where you can see an OCTNOVFUT spread trading at 42.

I want to write call and put nifty options
Positionally. In this case we can get profit from premium melting. Other wise the lose also will be minimum and limited. Can you give exposure?
For above trading method, what is the margin for 100(4 lots) qty?

hi, how is the margin required for a spread, along with shorting if we buy an option (the risk is capped), will the margin required is less or do we need to keep the margin required for sell side + the buy value of the bought option.

The total margin required is still Rs. 23,470 which is only Rs. 503 less than selling a naked 8100 Call. The maximum loss on this spread is only Rs. 4,617 (spread risk) + Rs. 383 (premium) = Rs. 5000, which should be the margin requirement if SPAN minimum calculations are considered. The risk is limited, and so should the margin.

The difference between the return on capital is almost 5x. Why is the margin benefit so little? Is it possible to enable SPAN minimum requirements on individual trading accounts?

Guc, what you need to realize is that the risk for such contract is never limited, there is always a big execution risk which is open and one of the reasons why margins are higher.

What if while exiting you got out of your buy 8200 CE position and market suddenly bounced up in this little time? The risk on your short 8100 CE would then be unlimited. Unless the spread itself starts trading on the market (similar to calendar spreads), it will never be possible to block margins based on what you have suggested. Also, this is an exchange regulation and the SPAN calculator gives what exchange asks us to block.

What is missing is the liquidity, basically we need a lot more traders coming to the market, when they do, new products will automatically come about. The bigger problem for everyone to solve is bringing in liquidity to the markets.

Hi,
If I am buying (call or put) options STT is implicated only on expiry but in case of writing (call or put) option STT is paid while writing it self.
Present brokerage calculator doesn’t help option writers, so what I feel is you can include two option at top like Option writer(with STT) and Option Buyer(no STT)
I believe am clear.
Thank you.

ah.. 🙂 , Got your question… In options, buying side anyways is 0 STT, so the STT shown on the calculator is the selling side only.. If you look at the default example on http://zerodha.com/brokerage_calculator , QTY is 400, buy price and sell price is mentioned, the STT which shows as Rs 7 is what is required to write the option..

If it is possible to set a trigger in the trading terminal for executing option strategy, it makes life easier. I mean when nifty futures trades at a set price, then the option strategy gets executed at market prices. Something like SL-M order.

Setting trigger like what you said, take an option strategy if Nifty trades at a price, it is little tricky, mainly because of the regulations. Exchange would consider that as an algo, which is not allowed for retail.

Nitin,
On the last line(algo for retail), there were a couple of SEBI circulars which wanted brokers to demonstrate appropriate risk management processes before offering algo access to their customers. Two questions:
1. Is there some SEBI circular that prohibits retail from using algos?
2. Is there also a SEBI circular under which exchanges derive power to validate algos?

What SEBI has recently mandated is that for brokers providing algo, to compulsorily take part in mock trading sessions and a stricter audit. Exchanges don’t let us provide an algo to a retail client, algos are usually enabled only on dealer terminals for which the customer has to be an Authorized person or sub-broker with the main broker. Let me try getting you the circular numbers on these.

Hi
This is very wonderful article.
Really I appreciate you.
Recently I have opened trading account with OpetionsXpress. It is really wonderful system for trading in Options and Futures.
Why we can’t have a trading broker with those kind of advanced position monitoring technology.
I recommend to you to visit that site and create a Virtual trading account and evaluate the platform which they are providing to their clients. Still we are far behind in technologies.

Sir,
I appreciate you. It is a very good article.
I have an account with Zerodha.
I have little knowledge in option trading.
What type of books is helpful for understanding the option specially option writing.

I guess if you are starting off it is best to start off buying options, and move to option writing once you are proficient. There are a bunch of books on option theory, but you would probably not understand until you have traded a bit. Try reading the derivative modules provided by NSE, Click this link: http://nseindia.com/education/content/module_ncfm.htm

Margin is marked to market daily, which means that if there is a loss you are asked to bring in those funds to your trading account by end of the day.- Extract from article.
I have query here. Suppose i write Nifty jan14 6500 CE, i am getting values- Span 9300+ Exposure 9400= total 18942
1. if i write above CE using MIS, what margin will be required ? Is it only Span=9300 ?

2. If i do short it for positional. I wrote it at 7 and today close it’s quoting at 13. Practically i am in loss.Theoritically i will be in loss if nifty goes above 6500. So for daily MTM, i will have to provide if and only if nifty goes above 6500 ?

Nitin,I have following queries.
1. Suppose i write Nifty jan14 6500 CE, i am getting values- Span 9300+ Exposure 9400= total 18942. Suppose I have whole amount (Rs.18942) in my a/c. I short the option when the premium is say 100. i will received 5000. Say next day the premium goes to 120. That means loss of Rs. 1000. My question is should I pay 1000? I want to hold this contract till expiry.
2. Is there any link or website available from where i could access ‘ margin required for writing index as well as stock options daywise?’
3. Are there any phone lines available on which if I contact my questions will be answered?

1. When the premium goes up by Rs 1000, margin required to short the option also goes up simultaneously and yes you should ideally transfer the loss to your trading account.
2. We are the only brokers in India to presently offer a SPAN calculator for all option writing margin requirements, and multi leg f&O positions. Click here to access the SPAN caculator.
3. 080-40402020 is a number where all Zerodha clients can call and have queries answered.

Query on the same line, till what loss your team will NOT square off position? I understand theoratically loss in option writing is unlimited but due to auto sq off in practical scenerio it will not be unlimited. What that threshold value will be?
How can i find that after this much loss my option will be auto sq off.

Assuming you short an option at Rs 100, if this goes to Rs 150, you are technically sitting on a loss of Rs 50(Rs2500). What happens is that the margin required to write this option goes up by the same amount, so yes when you make a loss the margin goes up and you are required to bring in more margin for that.

Hi Nitin,
I have some questions on policy document section for – Collateral Margins (Collateral against Stock):

1) For Transfer of Share from my DP to Zerodha’s beneficiary account and vice versa, whom do i need to write to?
2) Will be eligible for Dividend on my collatoral stock ?
3) The Dividend would be created in my Bank account or my zerodha account?
4) Rs 60/- per line item- So is it both ways i.e. from my DP to Benificary account and vice versa

One more ? 5)”Zerodha document Margin – to utilize the entire 70000 collateral benefit you will need to have a minimum cash margin of Rs.70000 ”

Example: If i hold Rs 100000 of Union Bank stock and i collateral it. I get Rs70000/- as collatoral to us. So if i write 1 OTM call option which needs a total approx margin of 35000/- how much cash should i be holding in the account? .. any thumb rule for rough calculation for the amount of cash balance to keep to service the premium?

1. You have to just send an email to [email protected], also keep [email protected] in c.c, with the quantity of stocks you want to pledge.
2. Yes you are eligible for dividends.
3. Yes Dividend is credited to your bank account mapped with us.
4. Yes, it is both ways, one round trip to pledge and unpledge.
5. We ask for 15% of the total margin required in cash. So as per the example you have given, for the Rs 35000 margin, you need to bring in around Rs 5000 in cash, and the rest is used from the collateral margin of Rs70,000.

Anurag, how much to backtest? The more the better I guess, but atleast for 2 to 3 years historical. As long as you are getting data from authorized vendors, data should be authentic. We are working towards a new trading platform, which should give you quite a bit of authentic historical data..

Anurag on algoZ you get only 22 days of intraday data to backtest on, but you can backtest daily candles upto 5 years. If you can wait for a couple of months, our new trading platform should give you a lot of intraday data to backtest on.

These questions on margin required for F&O are in addition Mahesh’s questions. Request you to kindly clarify.
1. In the downloads section, there are eligible securities for margin. In that list, mutual funds also are there, how to provide mutual funds as collateral margin?
2. As far as I know, NSE allows all kinds of fixed income securities like G-Secs, Bonds, Bank FDs etc. What about Zerodha? about these as collateral margin.
3. I would like to know about Bond trading/investing in NSE. Any chance Zerodha can provide Bonds online in your trading platform? Could you please write a Blog on that.
4. Finally my interest is to invest/trade in Bonds and provide bonds as collateral margin for equity F&O. Is this possible?

1. You should firstly have the mutual funds in your demat account, if it is not already there. If it is there, shoot an email to [email protected] and [email protected] asking to pledge.

2. For now we are accepting stocks, MF’s, ETF’s only.

3. Yes Bonds are already available on the trading platform, you can search for the one you are looking for. Yeah, will write a blog on this soon as most people don’t really know how it works.

4. Presently we are not accepting bonds, you could say mainly because no one has come to us asking to pledge bonds, the retail interest is really low. But, if you ask us to pledge after purchasing bonds, we will definitely find a way to work this out for you.

few queries:
(1) In Options writing – Is premium amount credited into the writer’s account immediately after the trade and only SPAN+Exposure margn need to be maintained if trade is favourable?
(2) As margin is MTM, if the trade is favourable, margin is released into the trading account everyday, is this right?
(3) In Zerodha, far months (example June 2014) options can be traded? how to check the margin required?

1. Yes premium is credited as soon as you take the position, and only SPAN + Expo is required.
2. Yes margin blocked reduces if premium moves in your favor, and increases if it moves against you.
3. Yes you can trade all options with us.

hi nitin last month i have open account with zerodha n my overall experience with zerodha custmer services is excellent n above everage,on friday i taken 6300 put for day trading but arround 3pm market start falling,my put is showing me price bet 79 to 81 but in my mobile i have nse mobile app showing price 87 88,i souare off my puts n when i check my trading price its show 87.6 but still ur trading platform showing less price,after 10 minutes i see same prices in mobile n in ur terminal,this problem i face with kotaksecurities also when i use their keat platform,why this type of price difference problem come,is their any problem with my wifi connection or some other problem,please clearify me rajesh

The software is actually the fastest way to trade, provided you have good internet speed (atleast 512 kbps) and a decent system. Can you shoot an email to [email protected], someone will call back and check why this issue is happening with you.

For interest rate you can put in 8% or so…(interest rate would not substantially effect the calculation tho!)

Its best to use a calculator, coz applying the Black Scholes model is really time consuming, also there is not direct way of calculating Implied Volatility (i.e we can only get implied volatility by TRIAL & ERROR, using the option price and the formula by assuming the implied volatility each time…only when you use the correct implied volatility, would the black scholes throw up the current market price of the option )

It is informative.In addition, let me make some comments about the vega effect on the premium of options, essentially it has crucial role on the premieum of an option.Simple method is that just watch India vix, if the value of indiavix is positive 100% sure the premieum has inflated and if it is negative premium of option also must have reducecd.Keep watch and make sure this piece of information is important

The one drawback or missing thing in zerodha is option Greek values are missing. It would have been great if the call option and put options show the value of delta, vega , theta etc. This will be really helpful for the users to know the internals of the market.

hi,
thnaks for ur support so far. i would like to know that the volume which is shown in currency futures chart. is it the total number of contracts exchanged or is it the total amount of currency pair exchanged . for example if the volume is 2 then this is 2 contracts of 1000 USD each or 2 USD in total

dear nitin i have never sold/write options so i have couple of confusion and questions regarding it. 1.do i need to sq off my otm written ce/pe on expiry day if they are expirying worthless? what i am thinking is if i sq off on expiry day i wont be able to collect whole premium right? 2nd question is what instrument i need to track for selecting strikes and settlements, spot or futures? please clear my doubts thanks.

hello , My most of queries has been already resolve after reading blog’s comments and reply ,but my q? is that ,Can I square off my short position any time by buying back an option, like we can do in equity/future to complete transaction ,for saving sum remaining premium or minimizing loss.

Absolutely, you can short at Rs 100 and buy it back in 10 seconds at Rs 99 to make a profit. Similar to futures or buying options, you are not required to stay in the trade till expiry, you can short and exit any time.

hello nithin,
If i want to exit from my short trade, can i only exit when buying quantity available on that contract ? what i have seen in option chain, there is no writes available in many contracts on different time frames.

RVKR, it is best to trade index options as they have ample liquidity. But yeah, if you are trading an option contract and you have no offers available to buy back your option, you will have to place a limit order and hope someone does.

Any idea why we do not have expiry for month of May 2014? I see Jun 2014 expiry immediately after Apr 2014 in the leaps. (Is it coz of elections, but still we should have expiry in the month of May 2014)

@Nithin, went through some of your posts here on giving stocks, MF or ETF’s as collateral for the margin for derivative positions, I have some questions:

1. These collateral MF’s (I think I saw the list also somewhere on your website) have to be in the demat account that I have with Zerodha?
2. When I have lets say MF as collateral, I will not be able to sell the MF’s only when I have positions in derivatives against it or irrespective of I have positions or not I will have to let you know guys then only I can sell them?
3. The reason I got interested is I have some money lying in debt/liquid funds, which I can use it as collateral against my options positions (usually I sell options, but not since 1-2 months as the IV’s are in the gutter and premiums are bad, so rather buying it lately). I have these MF’s with a third party reseller, I think I can either transfer the MF’s or sell there and buy here again. If I buy MF’s here again, I have to buy it on the terminal or how does it work? Also, lets say I do not have any positions and I want to exit out of these MF’s how do I do it?

1. Yes, you will have to have all that you intend to pledge in the demat account with us.

2. When you pledge a MF, ETF, or Stock, it is pledged with NSE, and as long as it is pledged you will not be able to sell it. To sell it, you will have to first put a request to unpledge and only then will you be allowed to sell.

3. Presently you can buy/sell any ETF, debt/liquid fund through the terminal itself. When you want to exit, you will have to first unpledge and sell it on the terminal.

1. You mentioned in your reply that this is pledged with NSE, how long does it take to pledge and get the margin. And in case I want to unpledge, I close the required positions to free up the portion I want to unpledge and eventually sell and get it converted into cash, how long it takes to unpledge and sell it in the market and convert it into cash. Basically the turn around time for both – pledge/unpledge.

2. I have bought the MF’s (I understand the ETF’s which is mostly like the EQ segment) directly from the AMC or through the third party sellers (with no costs what so ever incurred by me, any entry/exit load will be charged, but apart from that there will be no charges), and the transaction into and out of the MF happens based on the closing NAV for that particular day, how does it work on the terminal? the CMP or the price at which it gets executed? If it is at the price it gets executed I feel it entirely depends on the volume of a particular MF on that particular day and there might be huge slippage in terms of spreads itself and affects the yield? Or my understanding of this is totally wrong, how the buy/sell happens on the terminal.

1. Pledging is an overnight process, and similarly un-pledging also takes 1 day.

2. If you are investing into ETF, the best way is to do it on the exchange itself, you can buy and sell at the price you wish, so yes you can trade it at CMP. ETF will be tracking the underlying asset, and there won’t any slippage in terms of spreads, most ETF’s are quite liquid.

2. Yeah, ETF I understand, but I was asking about the MF’s. Lets say I want to buy “HDFC CASH MANAGEMENT FUND – SAVINGS PLAN – GROWTH” and keep it in my demat account as collateral. This is from the list on this link https://zerodha.com/downloads. How liquid would that be, how would I enter into this on terminal and would there be slippage. When I buy through the AMC or third party the buy/sell is on the days NAV price, how would it work on terminal? (May be something basic which I am missing 🙁 )

Sorry, was assuming that you were asking just about ETF’s. We are presently not allowing buying/selling mutual funds through us. You will have to buy it through someone and deliver it to the demat, and similarly if you want to sell you will have to sell it through a third party and deliver from the demat that you have opened with us. In this case, yes buy/sell happens on the days NAV.

Greetings of the day. I’m an Institutional Investor and I currently trade with Kotak Securities. Now, I was thinking to transfer all my funds worth Rs.60-70 lakh to my Zerodha trading account.
So, how safe is my money with Zerodha? Looking forward to hearing from you soon.

As I am writing this to you, am waiting to attend the award ceremony as a winner of the Entrepreneur of the year 2013 by CII, the reason I am telling you is because the due diligence for this award was done by Grand Thornton.
The question usually asked is because we charge so less, but the question to be asked is why everyone else is charging so much more in an environment where everything is online. As a business we have zero debts, have taken no leverage, don’t get into any funding activity, and have been more profitable than most retail brokerages the last financial year.

If I want to structure a long condor with RIL. Is it necessary to keep the difference between the strike prices same? like strike price of say 780-820-860-900 all call options. Is it possible to structure a long condor with these strike prices 740-800-900-960 all call options?

There is an investor protection fund setup by the exchange (NSE), it is over 1000 crores and the best part is that it has never been used since our exchanges and regulators have done an amazing job to ensure that brokers can’t default.

Nithin, any plan in increasing exposure in option writing for intraday only? more exposure should be given for short straddle position only for intraday, because while approaching to expiry its very hard to pay margin and get profit as premiums are very less, margin requirement should be of price of premium only. i am talking about more exposure for only intraday short straddle only…

One of the issue is especially with spreads is that the risk management tools don’t really do a good job monitoring combined positions. What makes the matter worse is that other than Nifty and Bank nifty, most other options are illiquid. It will be very tricky to increase the intraday leverage from 40% overnight margin that we ask for presently.

something should be think over, because genuine traders are hesitating in keeping more money (which cant be considered in investment for calculating ROI) in z-account. so they are not coming to you and approaching local broker because they would not require margin for intraday writing of an option. Something relaxation should be think over.

Firstly to pledge your MF it has to be in a demat form, so if it is not demated you can do it through us(ILFS). Once it is in demat, you can pledge and use the margins for trading F&O. If you want to sell this now, you will have to first put an unpledge request with us, and once done, you need to send a redemption request to your mutual fund house (similar to how you are presently doing). That’s it.

This blog is very informative and useful.
I have one question here. Let s say today at the close 6500 CE is 85. If I short it at 100, and nifty expires at 6340. at that time i am sure this call price would be around 0.05. At that time do i need to buy it back to earn profit or it is okay even if I don’t buy it.

the same for the loss side also. if it expires at 6900 .. at that also do i need to cover my position or just let it go. If I don’t cover it, how much would i have pay for the STT?

Once you have short an option, you don’t really need to cover it on the expiry day, it will get cash settled.

1. Inc case option expires out of money(your first example), the option expires at 0, so you get to keep the entire premium, and since it expires worthless there is no brokerage or other costs to this trade.

2. If it expires in the money, 6500 call will expire at Rs 400 (Rs 20,000 of premium), this much money would be debited from you and given to the buyer of the option.

You don’t have to worry about STT when you short options because you would have already paid STT, and it doesn’t matter if you let the option expire worthless or in the money. STT component plays a part when your buy options expire in the money, check this blog.

Hi
i want to know that, is their any limits for placing order in options i.e option lot size,order value
is it possible to buy 500000 woth premium options,what is the maximum order size .
i am waiting for ur reply.

NSE has put a limit of 200 lots of Nifty in order, so you can buy 10,000 Nifty options, there is no condition on value of this premium as such. If you want to take bigger positions, you can place multiple orders of 200 lots of Nifty.

Let’s say I write a May 6000PE and buy an April 6100PE, with the Nifty spot at 6500. Let’s say the Nifty falls by 400 points in a couple of weeks. How will the MTM work for my position? I would make a gain on my long position, but would be making a loss on my short position. Do you net the two positions together? Or would I have to add the entire amount of the loss into my account to continue to hold my short position?

If you use our SPAN calculator, you will see that the margin required to get into a position like this is around 20k. When Nifty drops by 400 points, the margin will most likely go upto around 30k, so you would be required to bring in the extra 10k as margin to hold this combined position. Basically you will have to bring in whatever is the increase in margin for holding both positions together.

The margin required on your account will keep going higher, you just have to keep a tab on your ledger and margin blocked, you don’t have to keep tracking on the SPAN. Also, our RMS team typically understands such positions, so as long as the risk is hedged like in your position, you can take it easy.

I try to write March 6500CE at rs 50 (450 Quantity).. I hold margin only 2 lac, it takes nearly 2 for writing, what will happen when my stock price increase to 75, whether my position will be square off or my span margin will decreased to maintain MTM…

Vinodh, when you write options, a considerable amount of margin is blocked which takes care of such a risk. In the event that the position goes against you, additional margin gets blocked at the end of the day. If it goes in favor of you, lesser margin is blocked at the end of the day. If you don’t have sufficient funds to cover for the additional margin to be blocked the position will be squared off by our RMS desk on the following day if the position is still going against you and you haven’t brought in additional funds.

Q2) The only thing that will shoot up will be the margin required to hold my futures?
Q3) How much time is given to top up my account with the margin required before any penalty?
Q4) How much time is given before the position gets squared off due to margin call?
Q5) Generally in such senarios by how much percentage increase in margin takes place?

1. Technically the futures position MTM loss cannot be adjusted by profits from the Put position. But as a RMS team we understand that it is a risk free position and will give you time to bring in MTM losses on your future position.
2. Yes
3. We will have to report margins to the exchanges at the end of everyday, if there is any short margin in the account at the close of markets (3.30pm), it is reported to the exchange, and there might be a penalty. But note that this penalty is only if the margin drops below the SPAN margin which will usually be around 20% below the total margin. So if 30k is the total margin for Union Bank, only if the margin drops below 24k will the exchange penalty happen.
4. We would typically not square off such a position, and will give you time as long as the value of Put has increased and making up for MTM losses. But note that there might be a exchange penalty for such a position.
5. Didn’t get what you were trying to ask.

My last question was. Lets say i buy a Union bank future on 15th May by paying the total margin of Rs30000/- and after election results the market tanks on 16th May and the stock tanks by 10%, so in this extreme volatility, by how much the total futures margin which is ideally Rs30000/- will increase by?

If I have to go by past data, a fall of stock price of around 10% in a day usually will mean the margin requirement going up 20% atleast, so 30k might become 36k. But again, this is not exact figure, it can be higher or lower.

@Nithin, seems like its quite complicated to convert offline MF into demat and vice versa (I did call up Siva and even for him it was new). I have few questions related to Liquidbees (The return on Liquidbees is really pathetic compared to other liquid funds, but anyhow), it would be great if you can clarify the same.

1. The margin given on LIQUIDBEES is same as for other funds, lets say I have Rs. 1L worth liquidbees in my demat, I would get 1L margin, but need to have 10k (10%) as cash in my account.
2. What are the brokerages for LIQUIDBEES? (Its the same as for any stock?) Also I read somewhere to promote this product the brokerage on this product is waived off completely with lot of brokers, is Zerodha one of them?
3. What are the demat charges? (Again seems like NSDL/CDSL charges are waived off here also, from the GS/benchmark website for this product)
4. Any other charges that Zerodha/ILFS would charge?

It would be great if you could give this information, as it requires to calculate the overall charges (If it turns out to be expensive and have to breakeven on the cost of this product itself) and see in % terms if it works out to get into this or not as collateral.

We presently charge brokerage, and the DP charges would be Rs 13. But Liquid bees are quite convenient, the reason we ask for 10% cash is to ensure that there is some money always for any MTM losses if they happen.

Hi,
I have question on MTM. In case you write an option let’s say 6600 CE and cover it by buying an option lets say 6700CE. will I still need to pay the MTM in case the market continues to rise or can it be off set with the increase in the buy option which is bought.

The value of your buy option position doesn’t really get added to your account balance, and hence it can’t be used for MTM of the short option where you are losing money. But as an RMS team, we are usually considerate with such hedged positions, and give extra time for you to bring in the MTM losses. But if the margin reduces by the minimum required (SPAN) as per the exchange on your short option, there would be an exchange penalty levied.

In Continuation with Harli’s question,
Can you please let us know what is the penalty that would be levied by the exchange
(in % or absolute terms) , Also would a broker charge interest on Dr margin Balances?

Can a broker provide additional margin by taking collateral of the Long Option (which has gained in value) to offset the margin required by the Short Option position.

Lastly, incase i have an equity position in RIL (which is my long term investment),
Can i use this equity position as collateral & make any trade to earn a Risk Free rate of interest.
(what is the interest you charge for loan against collateral of equity shares?)

Penalty is around 1% of the margin which is short than minimum required on a daily basis. It is pretty high, and it is just not about the quantum of penalty, this is considered being uncompliant.

Long option value is not credited until you have exited, and even when you exit it gets credited only T+1 day, so no can’t be taken.

Yes you can pledge your stocks, and get a margin after haircut. This comes with no interest, and you can use it to trade F&O positions. You just need to maintain some cash for any MTM obligations.

Unlike other brokerages, when you pledge with us, we directly pledge with NSE and don’t take it on our books and give you a loan at an interest (another advantage of trading @ Zerodha 🙂 ). So there is no cost for the collateral margin that will be provided on your stocks.

JS, I guess you are not doing your math right, if you are able to pocket Rs 20 (Rs 1000 per lot) in OTM options for Nifty for every 25000 invested that is a return of 4% a month and 48% annualized more than 4 times of what a bank FD makes. I will not be able to comment on any strategy as such, the post is an idea to initiate a trader to option writing.

Please answer to my below few questions –
1) Is INDIAN people allowed to trade in FOREX market?
2) If yes then Is Zerodha provide such facility? or Suggest any other Broker.
3) I want to start trading in Currency but my Job timing is 9am to 6 pm. Is it possible to trade in Indian Currency market after 6 pm?
4) What is minimum Margin required for trade in Indian Currency market for USDINR or any other pair.
5) Where Can I get basics of Currency market which can be used for Indian market?

Thank you very much for in detail answers. Need answers of below. Thanks in advance.
1) Which Currency market is having more trading volume out of NSE, BSE and MCX-SX?
2) Where can I get Historical charts of Currency? Also suggest website.
3) Where can I get live market charts?
4) Is Currency live market charts available in Zerodha software?

Dear Nitin,
I have following questions which are really frustrating me. Please help.

1) what is square off and exercise of the option?
2) What is the meaning of assignment?
3) What is cash settlement and stock settlement?
4) Suppose I short 1 Reliance call option 990CE Lot size 250 spot price 970 @ expiry it is ITM and the buyer want a stock settlement then how much it costs to me for a stock settlement.? How this stock settlement works?
5) For Nifty is it a cash settlement or stock settlement?

1. Square off is when you exit the option position that you are already holding. All options in India are cash settled and European(which means you can exercise them only on the expiry day). So in the Indian context, if you don’t square off your buy option positions until the expiry day, after expiry the option is considered exercised. So if Nifty on expiry day is 6950 and you are holding 6900 calls which you don’t square off in the market. This option is considered exercised and after 3.30pm, the position is cash settled and you get back Rs 2500 (50 x 50).

2. In the indian context there is no assignment anymore in the pure terms. But generally what assignment means is that if you have bought call options and I have shorted call options, if you decide to exercise the call option (right to buy), I might get assigned and have to deliver the stock to you. But as I said, in India all options are cash settled and there is no concept of assignment.

3. Cash settlement is when you exercise or at end of expiry you get back cash, if you get stock it is called stock settlement.

4. As I said there is no stock settlement, if you short 990CE and on expiry day you will have to give back only if Reliance is above 990, if reliance closes below 990 u don’t have to give back anything.

5. Same cash settlement

I’d advise you to read the modules on derivatives available on the NSE site. Click this link

Thank you for your reply and clarifying my doubts. say if I short reliance for strike price of 990 and at expiry it closes at 1050 means my loss will be (1050-990)*lot size=60*250= 15000. Right?
There is no chance of stock settlement, but a buyer want an stock settlement then what is my maximum loss? Is it 1050*250= 262500 or still 15000?

Yes, on expiry if reliance closes at 1050, you will have to give back Rs 15000, but note that when you have shorted there would be a certain premium credited to you. So assume you shorted when the calls were at Rs 30, and since it closed at 60, your net loss would be only 30 * 250 = 7500.

There in nothing called buyer wants stock settlement, when you short options the risk is unlimited, so for example if Reliance goes to Rs 2000, you will end up losing 1010 * 250.

Nithin, Icici direct offers an option plus product where the margin requirement for writing options is very less. But there a SLTP order is mandatory when you write options and there should be sufficient funds in the A/C to meet the losses in case the SLTP is triggered. Why not zerodha introduce that kind of a product?

Dear Nithin some body wrote this following comment in this blog on some times before

jojutv

It is informative.In addition, let me make some comments about the vega effect on the premium of options, essentially it has crucial role on the premieum of an option.Simple method is that just watch India vix, if the value of indiavix is positive 100% sure the premieum has inflated and if it is negative premium of option also must have reducecd.Keep watch and make sure this piece of information is important

Could you please elaborate this comment.Because I am newbee to the option writing.And indiavix positive 100%——- got me confused.How to check indiavix percentage– by intraday basis or contract basis?how to relate this one with the option writing?

Little confused myself on what Joju was trying to say, but if you are an option writer the best times to write options is if IndiaVIX is on the lower end of the range, check this post on IndiaVIX. The range of VIX historically has been between 12 to around 60. If you are writing options when VIX is trending up or on a higher end of the range, technically there is more volatility expected and hence not the best time to write.

If i short tata motors 420 call option at a premium amount of 16,one lot while it was 417.3.
Another lot of 420 call option at a premium of 19.45, while tatamotors is 430.
Now currently it closed around 454. Last traded price is 35.
Whether v have to calculate loss with option last traded price or with tata motors cmp?

Your current loss is based on the current price of the option which is Rs 35, after expiry (last thursday of the month), you can calculate loss based on the CMP of the underlying stock. Login to bo2.zerodha.com and check for open positions, this calculation would already have been done for you.

As a part of my hedging strategy….i am planning to Short Nifty call option (Strike 6800) of July contract @ Rs. 800/-, THIS IS AN ILLIQUID OPTION…There are buyers available at this prices (Rs. 800 is the bid price),

My question is regarding the M2M for illiquid options,
What if liquidity for these options completely dires up? so that there are no trades during the day, no LTP, no Bid or Ask….etc..

How is the M2M in such a case determined??
While i had short the option @ Rs. 800/- but when liquidity completely dries up, what rate would the exchange take to make M2M adjustments

Hi Nithin
part of my strategy I used to write both call and put at same value in every morning meant for intra day ( for example say if nifty in 7500,write the 7600 call at 40 and 7400 put at 40. so the the total value will be 80).some days total value is decreasing and getting profit but some days total value will increasing and end up in loss even if nifty in range bound time also.I could not understand this process.please help me.Thanks

Shorting both Calls and Puts is inherently a risky strategy! (you are betting on the market staying stagnant i.e non volatile) Even if the market remains stagnant – the daily profit earned is very small.

as a simple rule the price of an option is made up by 2 elements : Intrinsic Value + Time Value

(The price of an option is effected by :
a) Change in Value of the underlying
b) Interest Rate change
c) Changes in Volatility
d) Time to Expiration

in your example if the intrinsic value of the call option is Rs. 35 therefore it has a time value of Rs. 5 (Rs 40 being total vlaue – Rs 35 being intrinsic value)
Also, assuming there are 10 trading days to expiration.

As a thumb rule you can assume that Rs. 0.50 (Rs. 5 / 10 trading days) will be be the DAILY decay in time value. (for getting the exactly decay value for a day – use black scholes options calculator)

Again since the Total Option value consists of 2 elements : Intrinsic Value + Time Value.

The instrinsic value is determined by the underlying
eg. in case of call the instrinsic value is the Maximum of
– (Underlying Spot price – Strike Price),
– ZERO.

and the decay (Reduction) in time value will be Rs. 0.50 at the end of every trading day.

But Note :
1) if during the trading day volatility increases (the options value would increase)
2) if there is any change in interest rate announced the price of the option would increase / decrease
even if there is no change in price of the underlying on that particular day.

Also, if during the day if the Value of the underlying remains unchanged,
you get a profit of Rs. 0.50 on the call option + Rs. 0.50 on the Put option (assuming the DAILY decay of time value of put option is also Rs. 0.50 per day)
Thus a total profit of Rs. 1.00………….THIS STRATEGY IS REALLY RISKY TO ACHIEVE THIS “LOW PROBABILTY” OF “SMALL” PROFIT

Que : You must be wondering who would be on the selling side of options (if it is so risky)
Ans : its usually traders who have set up a hedging strategy

Hi,
While shorting options, if after placing buy order on f&o expiry day, if there are no sellers or the values of buying rate and selling rate are very heavy, then wat to do. if v kept that order open to b square off by exchange at wat rate will they square off and were do i get the details as to at wat rate it got bought?

All options are settled to the value of the underlying, so if you have shorted Nifty 7000 calls and Nifty closes at 7493, your calls will be assigned at Rs 493( 7493-7000). Similarly if you had shorted 7700 puts it will be assigned at 207 (7700-7493)

Assuming you already have a trading strategy in place, what is the most important factor is to contain risk. Since option writing can cause unlimited losses, you need to have a sound risk management strategy, a plan on what you will do if things went wrong.

What trading strategy you use, is quite a broad topic and don’t think can fit it into one answer.

So is it possible to get a rough premium value of the option for the next day by putting in these values. From the site “http://www.nseindia.com/products/content/equities/indices/historical_pepb.htm”. I am not seeing any volatility%. But when I put the below values in “http://www.option-price.com/implied-volatility.php”. I got the volatilty as 18. I would like to know if i am doing it correct. Pls correct me if I am wrong

I’m a retail trader who always trades in options and i came cross something called option Greeks. Is there any blog which is been posted from your side for info about that. Maybe posting one would help many to understand it on the software and also on paper.

Please guide what will happen in below case
If I short 2 Maruti call 2650 and at the expiry if Maruti is below 2650. option price on expiry is say Rs.1
I want to close my position and want to buy at Rs.1 but seller want to sell at 3.
How the trade will take place?

Swapnil, if you have shorted 2650 Calls and if stock price of Maruti is below 2650, you can let your options expire, because you will get to keep the entire premium as profits. There is a problem with stock options because of liquidity, if you want to exit you might not get the best price on the exchange.

But if you want to exit at 1 and the seller is at 3, the trade won’t go through.

There are no weekly options on NSE, it is available on BSE and you can trade them on ZT (that is if you are enabled for BSE F&O). If you are not enabled, shoot an email to [email protected], they will tell how to.

Dear Nithin,
in selling a put option if due to sudden fall of any stock or nifty if the put value becomes ZERO BEFORE expiration,will I be assigned the stock or nifty the number of lot I sold initially ?

The good thing(some say bad 🙂 ) with trading options in India are that all are European and everything is cash settled. What this means is that the buyer of an option can exercise only on the last day of expiry and even if he does, whatever is the difference is settled in cash.

Assume you shorted 7500 puts @Rs 50 on Nifty and Nifty tanked to 7000. Assume now that the liquidity in this contract becomes zero (i.e no buyers or sellers), remember that if stock/index falls, put value will increase it will never become zero. The buyer of this option is seeing a lot of money ( 50 has become 5000) but he can’t exit it as there are no buyers on this contract.
First thing you need to understand is that in India all options are settled in cash. So as a person shorting option contracts, you never have to worry about either taking delivery or giving delivery of stock if assigned. If you are assigned, you have to pay the buyer of the option difference in money from the strike to the current closing price.
Also all options in India today are european, what this means is that the buyer can exercise this option only on the last day of expiry.
So in the above example, if on the last thursday Nifty closes at 7000, you as a person who has shorted 7500 puts is compulsorily assigned, and you have to pay back 500 to the person who has bought the option ( net loss of 450 = 500 – 50).

Dhaval, time decay is only one aspect of option writing, but value of option going down also depends on volatility. If volatility picks up, both the premiums can go up, even when there is a time decay. But yeah, this is relatively a safe strategy, but if market moves in one direction very fast, it can still cause you a loss.

The idea of shorting the OTM call is to basically be able to hedge your long call position. The problem with shorting a deep OTM option is that you are hedged only to the extent of Rs 2.7, whereas shorting 7850, you are hedged until 11.95. What this means is that if market goes against you, (starts going down), the 55.2 you have paid, you will loose only around 43 in case you have shorted 7850 call, but you will loose Rs 53 in case you have shorted 7950 call.

Which strike you want to choose will depend on your strategy, if the idea is to hedge, there is no point shorting 7950 call to reduce your risk by just Rs 2.

ok no problem so we are only talk about stretageys right? about option.
thank you again because no one till today gives answer about this. but you will all your viewer their questions answers. thanks again

Dear Nithin
The option premium of the August contract is very low when compared to the previous month,even first day itself of this contract.For example Nifty 8000 call is at 12.65 and 7200 put is at 15.60.(400 points away from the .nifty).May I know reason sir

thanks for watching my stretegy. i am only see that if we sell call and put both at a current nifty rate price, we will get minimum 40 to 50 point profit in new months first week..
hear i am expening you how you earn.
i have make a position of august months call put same strick price in july last day expiry that day nifty trades at 7830 and i have sell 7800 call and 7800 put at 120 and 125 rate.
so my total is 245 points and after august one week when i see nifty its price is 7679 and my position profit is 200 points total so i have made 45 points profit in only one position with same strick price call put selling.
because of time peried.
see every month last expiry days nifty spote price and sell its call and put of same strike price. example if on expiry nifty is at 7900 so you have to sell 7900 call and 7900 put of next month and squar of your position after one week no have to wait. more and you will definatly get profit.
this is i am thinking and i am working so i do this stretage if you like it than. do it………….. and thank you. for watching my stretagy

Hi,
I am new to options and zerodha trading platform. My query is if I sell a put option of Rs. 980.00 of say reliance trading at 1000 and prior to expiry reliance goes to 980.00 then am I to own that many shares of reliance as represented by one lot of rel option or I have to cover with loss?

Anirban, in India all futures and options are cash settled, so you don’t ever have to give or take stocks. So if you are short 980 puts at say Rs 5, and reliance drops from 1000 to 980, the value of puts might go up from Rs 5 to Rs 7. Since you are short, this Rs 2 increase would be your notional loss. So you can either buy back the option at Rs 7 to book this loss or else hold it till expiry. At the end of expiry, if Reliance is at 980 or any value over 980, the value of 980 puts will become 0 giving you Rs 5 ( x lot size) as profits.

1. If i have sold 7850 PE & 8050 Call at combiined premium of say 5 & at expiry it is expiring worthless ( i.e 0) should I square-off it say at 5 paise or 10 paise OR else i should not square off & keep as it.

2. In this case , what will be the brokerage and STT implications as I have not buy it ?

1. You need not square it off at 0.05 or 0.1, you could just let it expire worthless. But if you need that margin to be unblocked which is being used for the short options to take fresh positions, you will have to.

I sold L&T finance 80 rs call at 0.20 p premium one lot of 4000, one day before the expiry, the underlying closing price is 67which means I am still in the money, the brokerage is blocking around 40000 why is so

When you short options the risk is unlimited and hence a margin is usually blocked which is again as per exchange regulation mostly. You can check out https://zerodha.com/margin-calculator/SPAN/ for option writing margin requirements.

I joined recently as a trader in ZERODHA, One day I called to technical team regarding to take the help for trading tool … they helped me very well to understand the things and they suggested me to visit the ZCONNET to gain knowledge. I had a doubt regarding options from past 2 years how it works actually …. today I registered in ZCONNECT and found the article for options …. I read it and gained knowledge about options … I felt very happy because I spent 1hr on this …. earlier I read some books and spent many hrs.’ in internet to understand about the options but not able to gain knowledge.

1. Only the options which are out of money on expiry will be 0. So if Nifty closes at 8000, 7900 Call will close at 100, and 8000 call will close at 0. 8200 puts will close at 200.
2. Yes, you can short and buy back immediately or anytime before the expiry day.
3. If you have bought 1st week of the month for Rs 5 and if NTPC is still at 140 at the end of the month, the premium would have already dropped below 5. If NTPC starts going above 140 and goes to 145 in the last week, it will definitely go above Rs 5.

I want to initiate a calendar spread strategy in Nov 2014. Assuming at that time nifty is trading at 8015. I decided to short sell the Nov 8000 CALL at 57 and BUY 8000 call options at 160 to create a calendar spread. My pay off diagram is as attached. In this you can see that maximum gain is around is 40 but the loss is around 100. How can improve this so that I can get gain is more and loss is less. If possible can you please walk me through this strategy step by step including steps to exit the strategy.

You intend to hold this till end of December or until end of Nov? Because if it is till end of Dec, your payoff diagram is not right. Nifty could close Nov at 8150, loose you 100 points and then drop below 8000 in Dec to loose you the 160 on long calls, potentially losing you 260 points.

If you are holding till NOV expiry, there is no way to increase your risk to reward using this strategy. What you haven’t considered in the payoff is that volatility for Nov calls might go up and since December typically is a low volatility month, it could drop for Dec. So Nov calls might go up, whereas Dec calls may not go up as much. This again will hurt your strategy.

Hi Nithin,
Thanks for your knowledge sharing….
I am new to options trading, I have few questions:
can I buy large amount of call options? say 7000 Nifty calls (7000/50 = 140 contracts) and sell it at increase of 5 to 6 points of premium? Do I get buyers for this huge amount of call contracts? is it profitable?
Or Is it advisable to buy only 200 calls (200/50 = 4 contracts) and wait for increase of more premium?
Kindly advise!
Arun

1. Yes you can.
2. Nifty options contribute over 50% of turnover, you will always get buyers/sellers for much larger quantities than what you are talking about. But if you are trading stock options, be vary of the liquidity.

What if there is no buyer for a contract(OTM) that I want to short at market value? Will my trade be executed or will it be in open state till any buyer is assigned? If my trade is executed immediately then who is paying the contract premium to me?
Also what will happen if there is no buyer till expiry? Will my OTM position be exercised at zero price?

Another way of putting it – If there is no volume on options I want to buy/sell?

If there is no buyer, you can’t short and your market order gets cancelled. You can place a limit selling order and hope someone buys it from you at that price.

So if you have shorted and liquidity dries up, it is a very tricky situation to be in, you can’t do nothing. If market is moving in your favor there is no issue, but if it goes against you the only thing you will be able to do is to take position in another contract to hedge this risk. On the expiry day, if your option is OTM, then of course it expires at 0.

The spread order tool is a highly significant tool for strategic traders like us.
We can make margin benefit through it.
Moreover we can calculate our maximum risk of loss before entering.
To put it in simple terms, as in Modi governance less government more governance is enhanced, likewise in Spread orders, less margin requirement more trading oppurtunities is enhanced.

I want to get some clarifications regarding it.
Through your articles i do understand that spread over entries will not get displayed in general order book and we can check our entries in spread order report. Yesterday i made a spread order entry, in spread order report it showed that the transactions got executed in completed orders coloumns. So i thought the order had took over, but when checked in back office report yesterday in open position coloumn those transactions are not there. So how do i know whether the transaction had got executed or not.

In order to get it clarified Yesterday(3rd november 2014) i called zerodha customer care, it kept on ringing, nobody to answer. then i contacted the sales number, the representative said, there was a problem with that line but now got resolved. I kept on trying but still its ringing nobody to answer. Please for customers convinience, pls provide us with alternative number for call and trade section. Hope u will consider.

Hi Nitin,
I tried to place an order to buy Nifty Call options 30000 units, but it got rejected with below message?
“RMS:Rule: Check freeze quantity for FO including square off order,Current:30000, limit set:10001 for entity account-DPxxx (I removed the DP number) across exchange across segment across product”,
Why is it set for only 10001. What is the reason, can retail investors trade beyond certain units in F&O?
Kindly advice!
Arun

In today’s trade SBI is up by 5.53% closed at 2942 with previous close was 2787.
Today it’s 2900CE was up by 276%
Suppose instead of up SBI is down by 5.53% what will be the 2900CE & 2700PE closing price for today.
Thanks,
Swapnil.

dear sir
I am Gerald from Hyderabad
do you teach how to trade the calendar spread . if you could you guide
I am looking for an 8 to 10% pm and was this was a risk free
Hoping to hear from you
my email address in [email protected]

Gerald, finding opportunities in calendar spread is quite tough considering there are a lot of computers playing the arbitrage game. Even if you spotted opportunities, a good year will probably yield you a maximum of 20% (there is no way you can earn 8 to 10% per month trading calendar spreads).

Hi Nitin,
While trading in OPtions (Nifty or Bank Nifty), where can I see the underlying? It is very difficult to track and know what is happening to the underlying, also there are no chart options for Nifty, bank nifty etc? how can we make strategies? Kindly advice!

Yes i know i can 🙂 I wanted to know your take on the idea of doing it. Normally shorting options is deemed riskier primarily bcoz of the reason that at expiry if youre on the wrong side,youll lose a lot. Is there anything else that makes shorting riskier than buying?

My idea is to use shorting using cover orders as a better alternative to buying(Normal product type) so that you dont need to worry about listless rangebound markets. Margin required may be higher than buying even if cover orders are used but thats the maximum we can go. Is it a good idea?

Manju, Option writing has definitely better odds of winning compared to buying options, even if it is for intraday. Typically time value keeps reducing even during intraday and hence you benefit as an option writer. The only tricky thing is, if the volatility picks up, option premiums can suddenly shoot up. So short options when you think markets won’t be too volatile and buy options if you think otherwise,even for intraday.

Hi Nitin,
Today Jan 2, 2015, Bank Nifty call options strike price 19500, traded volume (contracts) is 24,696, does it mean only 24,696 UNITS are traded in the market? so volume contracts mean number of units?
I am asking this just to know what is the liquidity in Bank Nifty options if I want to trade in huge volumes….Kindly advice!

You are doing great job by answering so many user queries. I have tried searching lot on SPAN and there is not much clear information available which can explain how SPAN works. I guess one has to experience SPAN by trading only and such experiences are quiet expensive 🙂

I have following doubts regarding SPAN and Exposure margin as I was testing few scenarios.
For NIFTY Short Strangle Position : Sell OTM – Mar-15 : Put 7500 & Call 9200

1. Exposure margin is calculated twice which is big blow to retail investor as it blocks great amount of capital.
2. SPAN requirement of each leg is added while doing margin calculation. This is another step where significant capital is blocked. Shouldn’t this be highest SPAN requirement out of 2 legs ?

NIFTY is cash settled and European index so why margin is blocked for each side of short leg when only one condition can be true at expiry. There is no exercise before expiry so no risk of early assignment.

I read your comments above regarding concern that trader may square of 1 leg of position leaving other short position open. Hence you calculate margin for sell side. However SPAN software which I believe runs multiple times on a day on entire portfolio should be able to catch such situation almost realtime or at end of day.
Shouldn’t SPAN which is designed to access risk of entire portfolio to reduce margin requirement ?

My point is that for spread and strange, investors are not getting real benefit of SPAN by reducing margin requirement based on risk level.

Kunal, firstly what brokers block is basically what exchanges asks us to block. So yeah, as a trader for so many years, I have always wondered the conservative approach exchanges take in this regard. I guess you have checked our SPAN calculator, the values that this return for various strategies are as per the exchange. You can blame them for this, but on the flip side because of their conservative approach we have never had a default on NSE, even when we had probably the most horrid times in 2008.

Are these regulations same for Institutional investors as well ? May be simple statistic of Retail vs Institutional Open Interest can point it out. Retail investor will stay away from options industry as one needs big pockets. I mean you are in better position to comment on statistics.

You rightly said that there are lot of things debatable in this business 😀 😀 😀 !!! and of course social forum is not right place for such debates 🙂 …
Being a CEO and still responding to all queries is big thing that you are doing !! Great work !!

1. Yes, and u can hold till 3.30pm on 29th Jan the expiry day.
2. No, only in multiples of 25
3. The way you bought, same way place a sell order for the quantity and price.
4. Yes, Nifty options are the most liquid instruments in the market.

NIFTY is at 8700 now, and still 7700 Put option of 29th Jan has 3 Rs premium. Is it not an easy “sell” and pocket the premuim? Or am I missing something here? Can we simply sell 3000 puts and pocket 90000Rs – its OI seems to suggest it can take that volume.

Of course, the risk begins ONLY if NIFTY slides down by over 1000 points in 5 trading sessions.

On the contrary, also curious to know who are the buyers of this PUT yet?

Guess you got the answer to your previous question :), yes you need to have 1.5 crores to pocket 90k in premium. Around 0.6% return for 10 days, still quite good considering the minimal risk. The buyers are people who are either covering their shorts (if OI is decreasing) or if OI is increasing would mean people trying to hit a lottery.

I am still to start with writing options I had a query I hope you will be able to answer this.

The CMP of Nifty is 8661, I write a Deep Out of Money Nifty Call Option say Nifty CE 9300 for Feb series and the margin blocked as per the span calculator comes to Rs 13439/-. Now my que is whether the margin blocked will remain same till Nifty crosses 9300 or will it increase as Nifty approaches 9300 and I have to provide additional margin to hold the position. Please Clarify

I am new to Zerodha and just came across this article. I have been using ICICI Direct for many years. My observations on these 2 trading platforms. Will appreciate if you can clarify:

1. The margin requirement for option writing in Zerodha is more than that of in ICICI Direct, what is the reason for that. In ICICI Direct it is 8% of the traded value for OTM options.

2. The MToM is never applied to options (its only to futures) and I don’t think it is a requirement by the exchange. The moment you short an option in ICICI Direct, a trigger price is decided and additional margin is required only when this trigger price is breached. But in Zerodha due to MToM applied on the written options, every day additional margin is blocked for those options.

1. The margin required to write an option changes with every contract, and it is not as simple as 8% of contract value. We have built a SPAN calculator that shows the margin requirements even before getting into a trade. Check this: https://zerodha.com/margin-calculator/SPAN/ . Btw this margin requirement is as per the exchange. For example 8900 calls shorting requires around 15k, which is much lesser than 8%.

2. There is nothing like a trigger price is decided in advance. At the end of every day, if the market moves against you the margin requirement for that option automatically goes up, and similarly if market moves in your favor, the margin requirement drops. It is not about Zerodha or ICICI, these things are determined by the exchange.

Now if the Nifty moves towards 8500, lets say it comes down to 8550 in the next few days.

In Zerodha: MToM is applied and an extra margin of 8850 – 8550 = 300*100 = 30,000 will be required.
In ICICI: a trigger price is determined the moment you write this option which is 8450. Extra margin is required only when Nifty moves to 8450 or below that. ie when nifty breaches this trigger price.

Hope my problem statement is clear to you.

Since the written communication always has its limitations, Is there a number where can I reach you.

Gurmeet, don’t know how ICICI works, but at Zerodha it doesn’t really work the way you have mentioned. If you use our SPAN calculator, you will see that the margins required doesn’t go up incrementally the way you have mentioned. A 8800 Put requires 15100 in margin and a 8900 PE requires 16200, when Nifty is around 8886. So the margin requirement goes up by only Rs 1000 for a put that is 100 points more in the money.

The thing I have seen with most brokers is that they don’t really have a tool like SPAN calculator, so most of the support staff end up telling some random rule to convince the client. Exchanges use SPAN by Comex to determine margin requirement, our SPAN calculator mirrors that.

🙂 Nikunj, you can write it any time of the month. We will soon start module on options on : http://zerodha.com/varsity/ . Since your knowledge in option writing is less, I’d advise you to take it a little slow. But do read the blogpost above, has explained most of what you need to know.

sir,
I am little confused about option Margin requirement …
1. The margin required by SPAN calculator is the minimum margin that should always b kept in my account while writing option…?
Or
2. there is some trigger amt at which you will call the customer for additional amount to deposit…
Or
3. You will call after the margin is swept away to deposit additional amount for continuing..

and hope you Call your client to deposit additional amount before squaring off..??

Dipesh, SPAN is the minimum that you need to have in your trading account to carry forward the position overnight. If the SPAN is not there, exchange puts a penalty. We ask for SPAN+exposure for overnight positions. If the margin drops below the minimum SPAN, you need to transfer more funds to ensure the positions don’t get squared off between 3 to 3.30pm. No, we don’t usually call before squaring off the positions.

If you don’t square off OTM, nothing happens. You get to keep the entire premium that you had received after shorting. For an ITM, all options are exercised, and how much ever the option expires ITM is transferred back to the buyer of the option.

Hi
Greetings, i have few doubts in options and shares please clarify,
1. can able to convert MIS option PE to normal?
2. what is the Margin available for option CE and PE (margin based on cash balance right?)?
3. share bought using NRML type can be hold for how many days?

Ex – if NIFTY 8700 PE is trading at a premium of Rs 110 , I want to buy 1lot then 110 * 25=2750 Rs and my trading a/c have 2750 Rs only, is there any need of additional margin required and can I square off my position at any time before the expiry.

Hello Nithin,
i’m a new trader… currently i’m trading in NIFTY INDEX OPTION CALL/PUT and Earning Rs.500 Daily. so i want to know that suppose i have bought NIFTYMARCH26 CE 8800 AT 104. and Current Price is 47.

so if my qty is 50. what will be my loss on expiry day ? i want to trade in 1000s qty in future. so i want to clarify it before do it.
And one more thing…. i’m simply buying OPTION INDEX (NIFTY/BANKNIFTY) CE/PE and sell it same day and getting profit. is option writing is more risky ? i’m very confuse about short call/Long put …etc.
if i’m writing option and my option is running in loss .. than can i block it anytime or exit from my own option ???? if yes then how …..
thanks in advance

Milan, if on expiry day Nifty is below 8800, you will loose the entire Rs 104 that you had paid to buy this option. So 104 x 50 = Rs 5200 will be lost. Options are very risky and it best to take it easy especially when starting off. We are starting on the Options module on Varsity soon, check this out: http://zerodha.com/varsity/

As a Trader i’m really thankful for your great supports towards your client.
you always ready to solve trader’s doubts and queries.
I have never seen a CEO supportive like you.

I’ve read that you were trading in day and working at night. so you were trading for a long time… over a decade. as i’m a fresh trader, i want to ask that what was your choice like Stock, Commodity, Option(Index/stock) or Futures etc…. and you still trading ?
and please suggest… what is the safest trading type in market like ..stock/future/option etc.

If you are starting off, the most important aspect of trading is risk management. So don’t ever bet more than 3 to 5% of your trading capital on a single trade. The safest way to trade is being non leveraged, that is basically buying stocks in delivery and then selling. Do check this entire section, quite interesting.

I have read the American Options can be exercised at any time and European Options can be exercised on the expiry date of the contract.

1. Can you please explain what is exercising the options?

2. Options can be sold and bought at any time within the expiry?

3. Suppose if i am holding a position a (Call Option) on Bank Nifty, tomorrow my premium is increased from the buying premium – the profit earned will be credited to my account tomorrow or it will get credited while i close the position?

4.Can you please suggest me any book on Trading in Options?

5. If I trade in options in MIS (Intra Day) how much exposure i will get?

1. In India all options now are European. Exercising is basically when the buyer of the option exercises his right. Since in India all options are cash settled, exercising would basically mean that you get back the intrinsic value of the option. So if you have Reliance 900 calls and reliance stock closes at 920. If you exercise, you get back Rs 20.

2. yes.

3. In options the profit will be credited only once you close/exit the position.

4. For option buying you don’t get any exposure. For option shorting, you will need 40% or 2.5 times exposure.

I am new in option writing but great fan of zerodha, the way you are responding queries here, my query is :–
How Call Sell Process works in Option derivative case ? in given example , Suppose I take 1 lot of 1000 shares of X Stock at 5 Rs Premium , Strike Rate is 520 and Stock current price is 510 (please note I took this from Call Sell Lot), after 4 days what would happen If Stock goes to 512 , premium is 4 Rs (due to Time Decay) can I square off this transaction or not?If yes then how much profitable amount would be credited into my account (calculation please)

· My Second query is if Stock goes to 530 and Stock premium is 0.5 paise on expiry date then what would be the total benefit/loss here

· Third Query is if I do nothing till expiry and stock is below my strike price will i get the entire premium if yes then when it would be credited same day when I sold it or after I am closing the exercise means expiry date.

my main question is mainly Stock premium reduce after few days considering this call seller will always be in profit then why we normally say he might get unlimited losses

Firstly you can get out of your option trade anytime you want. There is no rule that option shorts have to be kept till expiry.
If you have shorted at Rs 5 and you buy back at Rs 4, you make Rs 1 x 1000 = Rs 1000 profit.
If you have short 520 call, and stock is at 530, the premium will be minimum Rs 10, and it can’t be at 0.5. But assuming it is at 0.5, you will make a profit of Rs 4500.
When you short options, the premium is credited to you the next day itself. On expiry, if you do nothing and stock remains below the strike, you get to keep the entire money you received when you shorted the option.
What if stock goes 620? You have shorted 520 strike so you loose 100 x 1000 = rs 1lk loss.
We have just started options module on Varsity, check it out: http://zerodha.com/varsity/module/option-theory/

Hi nithin,
I have learnt so many things as new trader from z-connect. Thanks for supporting.

My query is if i short sell nifty call 9000 at 39 and later i buy it at 10 rs. Is it possible if my short sell was MIS … Than can i my buy as NRML to hold it overnight ?

One more query …. If nifty current is 8345 and i write option April 9000 call of nifty … Premium is 10 rs. Next day nifty goes down say 8320. Then premium price down to 8…… At a time can i book profit and square off this contract ? Can i exit at this time ? Or my contract will be open till the april expiry ….. If i can exit then how much profit i will get in one day ?../
.
Thanks

If you sell and buy, you are out of the trade, so you will not have anything to hold overnight. But if you short Nifty call at 39 as MIS, you can convert MIS into NRML and hold it overnight. Check this post.
Yes, you can exit it the next minute if you want to. 1 lot of Nifty is 25, so if you had short 1 lot at 10 and buy back at 8, so make 2 points or Rs 50 profit.

Hi Nithin ji,
I’ve just read varsity option theory. And it clear my so many dounts. Thanks for developing tool like this.
But one thing is not clear to me yet.
Suppose bajaj auto currently trading at 2040 and i bought call option strike price 2050 with premium 6.35.
So assuming that ….
Case 1) traded price on expiry is 2056.35. Than no profit no loss.
Case 2) last traded price is 2054. So intrisic value as 2054 – 2050 – 6.35… Still loss is 2.35 … Will my lot premium will be receivable ? To decrease loss from 6.35 to 2.35 ?

Hi Nithin,
i have observed that…. Nifty Option Shorted, this technique is more profitable than buying CE/PE Nifty Option.
Case 1 )
i short Nifty April 8400 CE at Premium : 39 , Lot :250. (MIS)
Than
i must have to Buy Nifty April 8400 CE Lot :250 (as MIS) before Market Close….
AM i Correct in case 1 ???

Case 2)
if today,
i short Nifty April 8400 CE at Premium : 39 , Lot :250. (NRML)
Than
i must have to Buy Nifty April 8400 CE Lot :250 (NRML) Before 30th April (Last Thursday)….
AM i Correct in case 2 ???

Also if you have bought as MIS and you don’t square off yourself, at 3.20pm the system runs an auto square off. Also if you have short as NRML and don’t square off on the last thursday, the position will automatically get squared off based on closing price.

Yes Anantha, as a retail trader, you have to use 4 different trades. You can use Basket orders. Institutional/algo traders usually have access to platforms where all 4 legs can be entered at one time and automatically.

Naveen, the margin will be blocked immediately, as soon as you take the trade. Like in futures, margin is not debited, it is just blocked in your account when you write options. If you exit your position, the margin gets unblocked.

Yes Prasad the odds of making money writing OTM options closer to expiry is quite high. But here is the thing though, the margin required to write 2 lots and get that Rs 110, you need to block a margin of around 40k (around 20k per lot). So the return on investment is around 0.2% for 7 days, not much right ;).

Nothing guaranteed in the markets Karthik. What if something crazy happened and market suddenly bounced upto 8900? Your short 8800 calls will now make a loss of Rs 97.45 (100 – 2.55). Margin blocked gets released as soon as you exit your positions.

ie., if i have 100 ICICI stocks in my demat account… and if i write 1 ICICI option call on Jun 1st… then I leave it to expire on jun month end.. now my question is
1. if my position is on loss, will the amount be debited or the shares will be debited from my demat account?
2. as i have sold option call on jun 1st itself, and if the buyer excercises his rights in between, then what will happen?

Karthic, you will have to first pledge the 100 shares of ICICI with us (this can be done by sending an email to [email protected]). Once you have pledged after haircut, you will be given margin to trade futures or short options in your account.
1. It is always best to keep some cash for any MTM losses. If the losses exceed the cash you have, it will start getting debited from the margin provided for your pledged shares.
2. All options in India are European, so they can be exercised only on the expiry day.

I have called Zerodha Support twice today and asked them a query on how to excercise the options to stock? But, on both the calls I got the same reply as “Options will expire on expiry date and you cannot convert the position to stock.” I am confused now. The main objective of call option is the obligation to buy the specified lot at a specific strike price on the expiry date na?! But they were saying that I cannot excercise (convert that to equity stock) options.

Karthic, in India all options are cash settled. There is no actual delivery of the underlying that happens. Suggest you to look at the options module here: http://zerodha.com/varsity/.
A stock is at Rs 100, you short 105 calls at say Rs 2. On the expiry day the stock is trading at say 104. You get to keep the entire Rs 2 that you had received by writing the option. If stock on expiry day is at 107, you have to give back Rs 2. Do read up the module.

First of all, I have no words to appreciate your initiatives in the form of Varsity, PI, Nest, Span Calculators, Blogs, low brokerage, sustained credibility and many more. However, I would still use much underplay word against your work as “THANK YOU”

My questions are regarding trading:

1. Do you suggest options are less riskier than future trading?
2. Do you suggest options writing is better than option buying?
3. I have been trading options buying, delivery & Futures but would like to venture in Options Writing. So my query is: Nifty Spot – 8100; I believe that it will not go beyond 8700; so I shorted Call of strike price 8700 at (for e.g.) 2.90 means 72.5 apx premium received. Now, if I see that nifty is trending upwards, so can I buy that call back if nifty strikes 8700 to limit my loss and close the position at the breakeven? If this works then why we say there are unlimited losses in option shorting when people can watch and close their trades at the breakeven all the time?

1. hmm.. tricky :). But yes, if you trade correctly definitely less riskier than futures.
2. Option writing has higher odds of winning than option buying as explained in the post above.
3. If you shorted 8700 call when Nifty was at 8100 at Rs 2.9. If Nifty goes upto 8700, the premium on 8700 call would have definitely gone up. Assume it went to Rs 100, if you now buy back, you will book a loss of Rs 97.1. (100-2.9). Your understanding is wrong, writing has unlimited loss. As soon as you shorted 8700 calls at Rs 2.9, if Nifty starts moving higher, automatically the premium will start going higher causing u a loss.

Thanks Nitin. Kindly confirm if now my understanding is right based on your inputs.

1. You mean if 8700 call has been shorted @2.9 *25 = 72.5 premium pocketed. But if Nifty starts moving higher, let’s say from current strike price of 8100 to 8200 then the premium must have gone up to 5.00 for e.g. Then if I buy back it will be @5.00 *25 = 125 that means a loss of 52.5.

So, 2 situations: (a) Either I have to wait till it gets down (b) I have to wait till expiry if I believe that it 8700 will remain OTM and will become worthless @0.05.

This means I am in profit as long as the premium is <=2.9; as soon as it goes above it even by a rupee because Nifty starts rising then I am in a loss?

2. Would it be then a better choice to trade nifty / banknifty using strangle for shorter dips through bracket order rather than taking risk of option writing?

How accurate is your SPAN Margin calculator? I have seen in a lot of the posts where you mention that writing one option contract would require about 20k in margin. But the SPAN Margin calculator on your website shows me that you’d only require 13,500 – 14,000 per contract for options that are about 5% out of the money. Could you please clarify as to which figure is more accurate?

Hi Nithin,
I have a query on options buying and selling. If I buy a CE (or a PE) and sell it after a profit, is my transaction over? I am asking this because as a seller of an option, I have an obligation to sell the underlying security to the buyer if he chooses so.
Does that mean that I may have to arrange for it at a later date?

Or am I not obligated for anything because I just ‘sold’ and option and didn’t ‘write’ it? In that case, who sells the security to the buyer of the CE?

Shailesh, once you have taken a trade and then exited it, you have no obligation whatsoever after that. Do check out http://zerodha.com/varsity/, you can get started right from the basics of everything to do with markets.

Odds are in favor of option writers only if they wait till expiry. Otherwise odds for option buying and selling will be defined by the strategy one uses. Also in writing options unlike buying one needs to keep a margin amount. So writing options not that attractive and also too risky (because losses are unlimited unless its capped my more complex strategies) unless one is doing so close to the expiry and that too OTM options. So am more or less an option buyer except when am trading near expiry day.

Hi,
I’m new to Options trading, please clarify the following doubts.
I bought options using NRML as product type in overnight example: NIFTY15JUL8450CE bought on 9/7/2015. As per contract note Gross rate per unit is 79. Although 11/7/2015, LTP is 86 still M2M showing -80. I bought 1 lot.
Why M2M is negative when premium rate is increasing ?

hi nithin , plz clear my doubts about nifty option writing intraday leverage
1) 2.5 times leverage of total margin in MIS . right ???
2) how much leverage in bracket order type and cover order type ???
( how much maximum stoploss required in bracket order and cover order ??
plz explain with example for bo and co )

Thanks for all the initiatives from Zerodha. I have a question regarding Zerodha option brokerage.

If I buy 1 lot of Nifty options at 84.15, my premium ( turnover ) is Rs.2103.75. I expect to be charged 0.01% of turnover 2103.75 as brokerage. However flat Rs20 is charged as brokerage. Could you please clarify.

Shan, it is 0.01% of the contract value (not premium value). So if you buy 100 nifty 8500 calls at Rs 20, the contract value is Rs 8.5lks and premium value is Rs 2000. This is 0.01% of Rs 8.5lks (Rs 85) or Rs 20 whichever is lower.

1. I short 1 lot of Nifty Call option of strike price 9000 at ₹ 6.80. It is highly unlikely that Nifty will reach by end of expiry in August; hence this option will expire worthless. Therefore I would gain 6.8 x 25 (1 lot) = 170. Is this understanding correct? Since it is a highly unlikely scenario of Nifty hitting 9000 in this expiry, it is a relatively much less riskier trade to take. Right?

2. I short 1 lot of Nifty Call at 132.5 and 1 lot at 89.8 just before close of trade on 5-Aug – both at the same strike of 8550 (nearest strike). The combined premium is 222.3. Due to time decay, the “combined” premium of Call & Put options should decrease by end of next trading day (say 215). Of-course the premium of Call and Put options may increase or decrease individually depending on the direction of Nifty movement, however the combined premium should decrease (due to time decay) assuming that volatility remains fairly stable. By end of next trading day (that is on 6-Aug), I can square-off my position and gain 7.3 (222.3 – 215) x 50 (1 lot for Call + 1 lot for Put) = ₹360. Is this understanding correct? Since there is almost always enough volatility in Nifty, I should be able to square-off my position easily and not worry about liquidity. Unless the volatility increases significantly in 1 day, there is a high probability of gaining in this scenario. Right?

Could you please confirm if I have understood shorting of options correctly in the above 2 scenarios?

When you short options the profits are limited but losses are unlimited. So the profit on one is never really proportional to the losses you make on another. But as long as they are the same, no need of more margin. But if markets start moving against you much more, the losses will tend to start getting bigger than profits, in which case you will have to transfer money.

Can we use equity mutual funds as collateral margin? To be able to use MF as collateral, would I have to invest in mutual funds through Zerodha first? Let’s say I invest 10 lakhs in MF’s and pledge it, how much of that 10 Lakhs will I get to use as margin money? Let’s say the value of my mutual funds increases from 10 Lakhs to 11 Lakhs, The amount of margin I can use will increase too, right? Let’s say I invest another 5 lakhs, will i have to pledge that separately as well? Thanks.

Abhishek, currently we don’t accept MF as pledge. But there are ETF’s which are like index mutual funds trading on the exchange, which can be bought and pledged, for example Nifty Bees, Bank Bees, among others. Yes, as the value goes up of your pledged investment, you get more margins. Check row 842 onwards on this file. Yes, if you invest another 5lks, you will have to pledge that separately.

Haircut will be around 20% on such funds. So for Rs 100 invested, you get around Rs 80 as margins.

If the trader does not square off his ITM option position and settlement is done by exchange on expiry day, then in that case, is there any brokerage by Zerodha? For example, if nifty is at 8500 on day-1 of the month and I sell a lot of CE_8400 option for Rs. 250*25 and give brokerage of Rs.20 and margin money. On the expiry day nifty reaches 8420 and my sold option has a value of Rs. 20*25 which I don’t buy. After exchange settlement, I get a profit of Rs. (230*25 – Brokerage – STT). What is the brokerage in this procedure of exchange settlement?

Nithin,
I have some basic questions on Options writing:
1. Is M2M calculated on daily basis on options writing?
2. How is F&O obligation calculated on options writing?

Would help if you can explain with an example. Let me take a hypothetical case:
1. I write an option worth 100 Rs on Day 1, it closes at 105
2. On day 2 it closes at 110
3. On day 3 it closes at 90
4. On day 4 I square off at 80

Can you tell me what happens to M2M and F&O obligation on each day?
Thanks

There is not really m2m as such that happens when you short options. When the market moves against you, the margin required keeps going up significantly. So in a sense it is m2m of the margin that is blocked for writing options.

Hi,
Consider below example – expiry date 24/09
On 01/09 – I write call 8500 CE Nifty @ 50 quantity – 100
Because of some reason market moves high very fast, let say
On 10/09 Nifty at 8700 and 8500 CE value is 300.
In the above case, I’ll be in heavy loss on 10/09 till but long way to go for expiry
My question – is there any possibility to square off my position automatically due to heavy loss on that day.

When you are short options and market moves against you, the margin required to write also goes up. So yes there is a possibility that if you don’t have enough margin that your positions could be auto squared off.

Short selling is nothing but selling a stock first and then buying it back. However you cannot short and carry forward such short positions in the Equity segment as you’d have to deliver these shares on T+2 day. If you want to short sell, you’d have to sell futures of such stock.

Yes, its like normal trading where you sell first and buy later. However when you sell first, you’ve to make sure you buy it back on the same day. When you sell you have to “give” delivery of stock not “take” delivery.

Apart from trading in Equity markets, you can also trade in the Futures & Options (F&O) segment. If you sell Stock in the Futures market you can carry forward such positions (i.e you need not buy them back the same day). To get a thorough understanding of how the Futures market work, do go through this module on Zerodha Varsity: http://zerodha.com/varsity/module/futures-trading/

sir, i have a query regarding option writing that suppose if we sell nifty option for ex —4 lots of nifty 8200ce then for squaring it offwhether we have to buy same lots of 8200ce or different lots of that strike price because price in writing option is more than (premium *lots*lot size), and secondly if we didn’t square it off till expiry then will it be square off automatically . please help me regarding this query .

I know that the lot size for Nifty options is increasing to 75 for november expiry and onwards. Has the margin requirement to write options also increased? The span margin calculator is showing that writing a 7000PE for november would require Rs.50,756 in margin, whereas I would have expected it to be only around 40,000.

sir , i have querry regarding blocking additional margin while shorting nifty , suppose if 7300 pe 1 lot i have sorted at 25, and initial margin blocked is 12k , suppose sir if it just increases to 125 , then approx how much more mony will be blocked in addition of above margin ,

Thanks for the nice article. I have a query though, let me see if I can explain my question!

Let’s say I short Nifty OTM call and put together and the margin required is 50K (for ex) for both the shorting.
Next day Nifty rises by 50 points, hence the margin requirement for my call shorting also increases, at the same time the margin requirement for the put short reduces.

Does that mean that, at any point of time the margin requirement remains constant if I short a call and put together?

Yes & No. Margin required to short depends on risk, and risk increases as and when an option becomes ITM from OTM for a writer. Assume that the market keeps going up and ur call option is ITM. Now, the margin increase for shorting calls will be much higher than the margin reduction for put option.

One more query that I had is, the margin that is calculated for shorting, is it for a certain range of the underlying product or is it calculated every day after the close of the market?

For example, if I short 2 lots of Nifty 8000 call and say the margin blocked is around 1Lac, will this margin be valid/not change for a range of nifty movement (say 7900 to 8100) or will the margin be re-calculated every night depending on the price movement of the nifty? Reduce if Nifty decreases or increase if Nifty increases.

The Margins are computed on a daily basis considering factors like change in underlying, volatility, time left for expiration. As these factors keep changing, margins also change accordingly. The Exchanges compute margins using a system called SPAN (Standard Portfolio Analysis of Risk) developed by Chicago Mercantile Exchange (CME).

All in the money options get forcefully exercised on the expiry day. So exercised automatically and how much ever the option is in the money is debited from your account and given to the buyer of the option. Check the option module here: http://zerodha.com/varsity/

1. When you are buying options there is no concept of margin, only when shorting options. For buying u need only premium, so if lot is 1000 and premium is trading at Rs 10, you need Rs 10,000 to buy this.
2. Yes of course.

hi sir,
I am sorry if this topic has been discussed before but I have a small confusion
if i short OTM – CE & PE one lot both for intraday then
will i have to pay the premium say for 7700ce & 7700pe if shorted for intraday.
in the SPAN calc it shows premium receivable 5168 & 17678 is that means that this amount will be deducted from my account for intraday

Satyajit, when you short options you need the total margin showed on SPAN calculator. In this case it is around 86k, out of this 17k will be credited back to your account next day morning, this is the premium that you would receive for shorting the option.

3 copies of the this form duly signed by shareholders along with original physical shares held in the name of the person who has a demat account at Zerodha. Demat charges are Rs 10/- (Subject to minimum of Rs.25/- per ISIN)

Hi,
I would like to know if I write nifty call option 8000 (currently nifty is at 7400). Its premium is say 10 rs.
after 10 days, nifty is at 7600 but the premium of nifty 8000CE is 6 rs. If I square it off, then will I earn rs.10-rs.6 = rs.4 profit per option. The expiry is 8 days away from the date of squaring off. So Instead of waiting for expiry, i square it off before expiry. Kindly guide me if I am correct. If I am wrong, please let me know how.

I have following query with respect to trading. It would be great if you can please throw some light on it.

1 – Is there a facility with zerodha to place short strangle like we have calendar spread for futures in Pi?
2 – If I place order in Pi, can this open position be viewed in Kite and vice versa ?

Suggestion – There should be small tab in order window which on clicking should show the approx margin that will get blocked based on the inputs / parameters provided by the trader. This will help trader placing order in 1 shot. Thanks

Any one plz tell, if nifty is at 7000 and i short 6900 call options inyraday at rs. 100 means i got rs. 100 as premium, now if i covered it at rs. 110 then what will be happened ? 1. I will get a loss of rs. 10 or it will be no profit no loss ?

Today I wrote 7 contracts (525 qty) of NIFTY 6950 PE at 1.35. My stoploss was at around Rs. 13 as SL-M order as I was pretty sure NIfty will not move below 6950 in the remaining time. But in the below chart you can see a spike came at 2:55, My stoploss was hit and executed at Rs. 19.65. If I look closely to that 2:55 candle I see that it made high of Rs. 17.45. Then how my orders are executed at Rs.19.65?

One other thing, I changed my mobile no. 1 month ago. So I updated it in Q, CDSL easi. But still I am not getting any EOD transaction SMS to my new no. I have contacted support several times. They have also updated new no. But still no transaction SMS in new no.

Hi Nitin,
I’m an existing client of zerodha.
Nifty 6600p march expiry is trending around Rs. 6, I want to write it till expiry with 100 lots. How much margin need for this trade and how much brokerage stt etc etc of total expenses it will cost to me.

34 lacksss !!!!!!!!!
Are you sure ?????
Sorry venu as i mentioned already in my previous post I’m going to write 6600pe which is currently @ Rs. 6, so accordingly 6×75= Rs. 450 for buying 1 lot,
450×5 or 7 not sure ie. In this case if 5 times then
450×5= Rs. 2250/lot
So for 100 it’s
2250×100= Rs. 225000 required 🙂
*i may be wrong so please someone through some lights on it
Thanks in advance

Jai, option writing involved unlimited risks. If you use our SPAN calculator, you can see how much margin required for shorting 1 lot of 6600 PE. It is currently around Rs 17000. So for 100 lots Rs 17lks. All your charges you can find it out yourself using https://zerodha.com/brokerage-calculator

Dear Sir,
thank you for this amazing explanation in plain and simple language.
My query is
if i am selling an option contract, and if i do not close my position and let it be exercised at expiry, then my profit at expiry is the difference of my sell and buy premiums OR its the difference of my selling strike price and spot price at expiration…
Example…
IF i sell 100 quantity of nifty 9000 CE @ 100 and if nifty expires at 8500, then at expiry my profit will be ((100-0)X100=10000) OR ((9000-8500)x100=50000) ?
Awaiting your reply.
Thank you.

Say for March Expiry if i write 1 lot of Nifty 7750 CE and if Nifty goes above 7750 on expiry date should i need to buy it on expiry date since i will be in a loss or i can exercise the option as well (Given that i do have the required balance in my account).

I have a very basic question but it’s confusing me. I sold one lot of Put options on NIFTY. I expected a premium to be received, however when I check under “Funds” on KITE, I see the premium amount as negative and my total cash + margin position same as before (i.e. no sign of premium getting added).

I’m a Zerodha customer. I want to know whether I can get any margin on writing options for Intraday. Currently as per your margin calculator, I have to approximate pay Rs 40,000 to write 1 lot of Nifty. So, is there any margin available like you have for Intraday trading in the Cash market?

I have a question regarding option margin. If I have sold NIFTY-MAY-7700-PE at Rs 100 and If nifty decreases suddenly and price of NIFTY-MAY-7700-PE increases to Rs. 200 or even more, will my position gets squared-off automatically? , provided the amount in my trading account is equal to the margin required when the price of the option was Rs.100.

Though I would be in loss now, assume that on the day of expiry nifty will be above 7700 and I will be under profit.

Was just wondering,if you guys have tools in Options segment, that could hypothetically auto calculate;

-Max risk/max reward for set ups like strangles,iron butterflies,etc;
-Max +ve & -ve ROI on such set ups;
-ITM probabilities for various option strikes
-Basic money management stuff like how much margin will be blocked say if i put on an Iron Condor on the Nifty etc etc

So if we are able to quickly have above info on our fingertips,
Something like what Tom Sosnoff did with Think or Swim in the States- They have really empowered thousands of traders there,if u guys can do the same here,would be awesome.

One specific question when it comes to Option writing.
Here is an example:
ICICIBANK Put Option shorted on 21/05/2016 at 3.28 PM.
Strike Price: 220, Premium: 3.35
I want to know what will happen on Monday (23/05/2016) in the following situation.
– ICICIBANK stock moves up with a gap up.
– 220 strike price premium opens gaps down by 1 Re to 2.35
– At the end of the day (23/05/2016), ICICIBANK recovers a bit and the premium closes at 3.00.
In this case which of the following will happen?
A) A premium of Rs 0.35 (3.35 Cl on 21/05 Less 3.00 Cl on 23/05) will be credited to my account OR
B) I will have to pay a premium of Rs 0.65 (Op Premium 2.23 Less Cl premium 3.00)
Your guidance will be much appreciated
Thanks,
Siddhant

The entire premimum of Rs 3.35 is already credited to your account the day you short the options. Your obligation of paying Rs 3.35 reduces to Rs 3, so the margin blocked for writing this option reduces proportionately.

Hi Nitin,
Sorry to keep bothering you on this. But, somethings are still not clear to me where overnight options writing is concerned. Here, is an example to explain the doubt in my mind.
Today (13-Jun) LT – 1450 Puts were trading at around Rs 26 at 3.25 PM.
Let’s say I shorted the same. An amount of Rs 7800 (300 * 26) is credited to my account at EOD….Is this correct?
At the same time I need a margin of around Rs 65000 in my account to do so…..Is this correct?
Until I square off the 1 lot that I have the next day (14-Jun), I will not be able to use the margin…..Is this correct?
On 14-Jun, I square off the option at Rs 24…..Here, Rs 7200 (300 * 24) will be Dr to my A/c freeing up the margin of Rs 65000….Is this correct?
In the bargain I net Rs 600 (Rs 7800 – Rs 7200)…..I guess this is a given.
Thanks,
Sidddhant

@K.Joshi and Nithin,I faced slippage problem trading only 30 lots of NF Options many times.
I use SL-M order for buying and limit order as a Target order.
So,technically 3 points is not a good idea if you considering a scalp with NF options.

Question : – 1) – for arbitrage orders and covered calls or put with spreads. will it count as each order separate margin or exchange can recognize these as covered items( in order to block as less margin as possible)
2) – what possible way to block margins as low as possible – since writing both OTM items, or different calendar periods products can lead to minimal risk so as minimal profit. but will the margin be discounted or it will be blocked in full.
3) – guide for lowest margin block for option writing.

1. Exchange doesn’t recognize this as a combined position. You will have to keep separate margins.
2. You get margin benefit, check our SPAN calculator to see how much margin benefit.
3. margin requirement is stipulated by exchange, no way around this.

Hi Nitin,
Just trying to get some day trade option writing concepts clear here.
Am looking at Nifty 8200 Puts (at 12:26 today) its at 121.65. I want to short the same now.
What I see when I put these details in the SPAN calculator are:
SPAN margin – Rs: 27,836
Exposure margin – Rs: 18,352
Premium receivable – Rs: 9,461
Total margin – Rs: 46,188
What is the Margin that I need in my account to short 1 option of this 8200 Nifty Put?
Is it ‘Premium receivable – Rs: 9,461’ OR is it Rs 9237 (40% of Rs: 46,188)?
Thanks,
Sid

For Day Trade too? Cauz when I hover the mouse on the ‘?’ of ‘Total Margin’ it says, “Margin required to take intra day position would be 40% of Total Margin’.
Is there something am missing here? It is for this reason I has asked, “Is it ‘Premium receivable – Rs: 9,461’ OR is it Rs 9237 (40% of Rs: 46,188)?

I always wanted to trade Nifty Option.I’m basically a scalper with a very small capital to trade.But Sir,while trading Options I cants place SL and Target order at a time(due to small trading a/c).So I had to trade stock fut where I can protect the loss with SL and desired target order.

Can you give any clue how to solve this issue,so I can enjoy Option scalps with Zerodha?There may be some solution to this..someone may e doing this.

I choose to WRITE OTM Options at random around 600-800 points away, eg; if NIFTY SPOT is @ 8000, then i WRITE 8600 CE or 8800 CE of the Current Expiry and square off my position, when my target amount of profit is achieved. i repeat the same multiple times within an expiry. My success ratio is average and my returns are not consistent. What is the professional way to apply this strategy / choose the right strike price / how to apply a stop loss mechanism for the same. Do we need to apply technical analysis for adopting this strategy, if yes, how to go about it…..Kindly Clarify

I choose to WRITE OTM Options at random around 600-800 points away, eg; if NIFTY SPOT is @ 8000, then i WRITE 8600 CE or 8800 CE of the Current Expiry and square off my position, when my target amount of profit is achieved. i repeat the same multiple times within an expiry. My success ratio is average and my returns are not consistent. What is the professional way to apply this strategy / choose the right strike price / how to apply a stop loss mechanism for the same. Do we need to apply technical analysis for adopting this strategy, if yes, how to go about it…..Kindly Clarify

Hi.
Please consider this example. I have rounded the numbers for easier understanding. I got the margin from zerodha calculator.
I want to sell a call option at strike price of 400.
Span margin – 1,45,000
Exposure margin – 90,000
Total margin – 2,35,000
Premium receivable – 10,000.
Now assume the premium is Rs.10.(10×1000)
1.If by expiry the premium stays below 10, should I square off just let it be?
2.If by expiry the premium goes above 10, can I square of at say Rs.12 to book a loss?
3.If before expiry the premium drops to 2, can I square off to book Rs.8 profit?
4.Will my total margin get credited back automatically to my account when I Square of or dont square off on expiry?
Please explain.

1. It is upto you. You can either hold or let it be. Whatever the stock closes above 400, that much premium will get reduced from your account.
2. Yes
3. Yep
4. Yes, end of day the margin gets unblocked.

Say some stock (for eg:Adani Ports) quoting at 215, and it’s 200 PE is quoting at 3.9, and with the assumption that, this stock will not go down below 200 on expiry date, I have sold stock 200 PE (Instrument Type: OPTSTK, Option Type: PE, Action: Sell, Strike Price: 200). In this case, 9750 will be credit to my account.

Queries:
1.If the stock close above 200 )for eg: 200.5), then 200 PE becomes 0…in this case, my profit will be 9750 right?
(somewhere I read, at selling point STT will be charged..where can i see that charged amount?)
2.If the stock closes at 199, then 2500 will be deducted, right?
3.In the above selling scenario case, how much amount would have blocked, considering 15 more trading days exist before expiry?

1. Yep. Since you have written the option, you have already paid STT when writing. You don’t have to worry about paying higher STT, firstly because on buying side there is no STT and also since it expired worthless, there is no trade itself.
2. Yep
3. Margin blocked, I can’t tell you exactly. Use our SPAN calculator: https://zerodha.com/margin-calculator/SPAN/

Need help to understand regarding Index options.
1) Incase of Nifty Aug 8700 index option is 92.00, What is the Volume of that index
2) When it increased and decrease. What is total Buy / Sell Quantity.
3) Same can be happened for PUT also, so on expiry what would be effect of them.

Let’s say that my view is bullish. Sometimes I find that buying a call earns you better profits rather than selling a put (of the same strike price). Yet other times, selling a put earns you better profits rather than buying a call (of the same strike price). Why is this so?

When I try to short any option the initial margin ask price is very high and when the order gets executed, the margin blocked is very less. To give an example on today’s experience,

When I placed a short order of 4 lots (300 quantity) of Nifty JUL 8800 PE, as the order was in the queue yet to be executed on my price, I saw that the margin blocked was around 90K and later when the order got executed, the actual margin that was blocked was only around 29K.

I am guessing you had other positions open in your account. Exchanges block margin on portfolio once a position is taken. So if you were shorting puts and you were say short futures, that is lesser portfolio risk and hence margin required for both positions would reduce. You can use our SPAN calculator to check margin benefits.

For example, I short/write SAIL(Steel Authority Of India) call at 1.35/- (Qty:12000), they are blocking 90,000 as margin from me. At the end of the day, for example, it goes to 1.00 but I did not buy the same to square it off. If I wait till the next day, will they take any extra margin next day also?

Same way, for example, it goes to 2.00 and I wait for next day. In this case will they take any extra margin next day also?

1) How those margin requirement is to be satisfied ? Is it cash or it can be stocks as collateral as well ?
If my understanding is correct it can be 50:50 (Cash : Stock). Please correct me if am missing something.

2) If stock is used as collateral does brokerage charge any DPC or any charges ?

3) I made one trade- Sell ONE LOT BANKNIFTY for strike 19700 and expiry at Sep-End. Current Bank Nifty is around 19800.

Thanks for your reply.
1) Went through your post and other linked discussion.

So my understanding is 50% margin needs to come from cash and rest can be collateral.
-And interest is charged on shortfall of cash margin. If 50% cash (or liquid bees) is maintained. No interest charges.
-And on collateral only charges are of pledging and un-pledging, which in zeroadha is Rs.60 per script.

Can i short/write banknifty weekly options on its expiry day (i.e thursday) & that too near the end of market hours?
For ex. if i short/write BANKNIFTY22SEP1619900PE at 9.50/- (Qty 400) at around 2:00 pm & the option value goes to zero at 3:00 pm. then i would be making profits in this scenario?

Assume I sold a put option at the beginning of the new series. After few days, I realized that it is going against to my expectations. Can I square off my short position before the expiry date? I just want to know whether I can stop getting in to unexpected loss.

Absolutely you can exit any time you want. If you are trading stock options, some of these contracts can illiquid, so even if you want to exit, buyers/sellers might dissapear. In such case, you will have to say buy futures to book your loss. Whenever the liquidity arrives in the option contract, you can exit both together.

Thanks for your valuable information and sharing such a nice idea to overcome the risk. I have not seen such a kind of guy like you. Most of the people afraid of sharing info to others by thinking that they will benefit out of it. Even I myself feel the same.

After looking at your posts/sharp response, I realized a lot and trying to develop at least some kind of your personality.

In continuation to my earlier question, how to identify whether call or put writing has taken place on a perticular strike price .Also, how to identify call or put buying has taken place in considerable amount on a perticular strike price. Is there any indicator something to measure this?

Nizam, if open interest goes up, it means option writing is happening. But this also means that people are buying more options. The logic here is that option writers are smarter lot, so if open interest of calls go up, so maybe that means market won’t go up. So check for open interest.

If you are seeing OI go up on a particular strike, if you believe that option writers are usually right, that would mean that option writers don’t expect price to go above this strike in case of calls.

Hello Nithin,
I am Asit Maurya.I am a trader in F&O segment.I want to know something.Suppose I have 5 crore rupees and I want to invest it and get 20% (1 crore) everyday so , where should I Invest to so that my order gets executed easily as it will be a huge order it will take too much time to be executed and I don’t want it to be overbought so there should be a good liquidity Please Help.is there any way in zerodha to invest in Foreign Market F&O.
Thank You

🙂 are you saying you want to make 20% daily? I can’t think of any instrument in the world that can give you this kind of return. Your best bet to trade bigger quantities is Nifty futures and options. Indians are not allowed to trade derivatives in International markets, only equity investment.

Dear Nithin sir, suppose i sell nifty 8800 call at 50 rs , if nifty crossess 8800 , to hedge my position in future how many number of future lots to be buy to hedge my postion and what is the formula for this….

Hi Sir,
The post is awesome.
I am going to write ATM call + put at the start of month and hold till expiry. The premium ofcaurse will be melted to some extent and i am able to get some profits say near about 6-10%.

Now let say i have written call+put at total of 300 and suppose if it goes above 300 then
Do i have to pay more premium?
If yes then how much it will be?
Do my broker will square off the position without asking?
If the total goes down lets say 200 then what about the extra margin amount that i have paid?

1. If the combined premium goes up over 300, that means you have started making losses. If the lot size is 100, if the combo goes to 350, it means you are making losses of Rs 5000. So yes, margin goes up when the premium goes up. It this goes up significantly more than 300, yeah broker can square off if you don’t have enough margin to cover.

2. When it goes lower, margin blocked will reduce, you will have more money let to trade/withdraw.

sir if i write sbi 250 call at 5 rs and if it rises to 6 rs how much margin more required and at what price broker ask me to increase margin and at what price broker automatically square off my position.

Margin to write SBI calls will be around 80 k to 90 k. lot size is 3000, so rs 1 loss will cause you a MTM loss of Rs 3000. Usually when you lose 10 to 20% of margin required is when broker might start squaring off your position. So say when you start making notional loss of upwards of Rs 9000 (when call goes to 8 and above).

I want to trade covered strategy in Nifty selling like: Nifty spot price on 24rd Nov is 8006 and i am writing 7800 Put and 8200 Call…at expiry nifty is at say 8000 so i will get full premium for both side…in option chart we can see that there can be seen strong base at PUT and CALL OTM side…can i use that data to trade both side..??

Thanks for the reply…One case study i am indicating..Please suggest me…At Nov 25, there is strong support of OI at 8000 PUT and 8300 CALL…But there is much more OI at 8000 PE than 8300 CALL…it is happening at every month so i will consider CALL or PUT based on highest OI at expiry for next month trade..Am i thinking right..?? please advise me ..

Am a newbie in trading. Have read the First options module in Varsity.I want a clarification on the most basic issue, Kindly do not laugh if this question may seem foolish to you.
If I am bullish on an underlying asset I can BUY a call option and if I am bearish on it, I can SELL/WRITE a call option. So if both the perspectives of an underlying asset are being satisfied in a single instrument [The call option], what is the need for PUT option ? Are Call buy and Put sell AND Call sell and Put buy not equivalent to each other ?
Thanks…

🙂 the payoff graph for options buying and option writing is completely different. Yes if you are bearish you can write calls, but when you write calls, the profits are limited a and the losses unlimited. You need to put in a margin to take a position, unless buying where you need to bring in only premium. Suggest you to read through the futures and options module here: http://zerodha.com/varsity/

Hi, have a few queries, please support.
1. If we write an option, should we square off that position before expiry? If that is the case and we forget to do so, any penalty is imposed?
2. When is the premium for option shorting credited to the trading account? On the day of expiry or immediately?
3. If due to market movement, there is an increased requirement for margin, how will the trader be communicated about that and how much time do we have to add funds for the new requirement?

1. Not required to square off, on expiry all options are settled to the underlying price and any p&L is credited/debited. If you have short options, no additional STT (penalty) to be worried of.
2. Immediately (T+1 day)
3. Trader has to keep a track of this, it is best to have all MTM losses in case it is big (more than 10% of margin) transferred into trading account before market closing.

Thanks Nithin for your prompt reply. Regarding the 3rd point, can you please elaborate on the MTM losses and how it relates to SPAN and exposure margin? if in case, we do not have access to market updates, does Zerodha call/email me regd the updated requirement for margin if falling short of existing funds?

No, there’s no call/email done, instead we’ll be sending an SMS alerting you on the shortfalls in margin. But as Nithin’s said, the duty of ensuring sufficient margins are kept in the account always vests on the trader. The trading platforms gives you a live update on the margin requirements for the positions you’ve held.

If i am call writing 10 lots(750) @ Rs.20 and if i am buying back the same 10 lots(750) @ Rs. 1 on the same strike price within the expiry 30 days then please explain & advise how much profit i will earn.

One more doubt is that if i am invested with Rs. 1,20,000. If i am call writing 10 lots(750) @ Rs.20 and if it moved to Rs. 40 on the same strike price or if it goes beyond Rs. 40 then what will be the scenario? Also please explain how much it will be deducted from my total amount of Rs. 1,20,000/-

Also please provide your suggestion for Nifty call writing Jan 2017 series and at what strike price we can write call option(including no. of lots) to my value of Rs. 1,20,000/-.

We’re against giving suggestions/recommendations.
On the query you’ve asked, every time you short an option, margins get blocked. When the contract price goes against you, your MTM losses increase and your margin erodes. This is when you’ll have to bring in additional margins or square off your positions. In the above example, since the contract has caused a loss of Rs.20, your MTM loss would be Rs 750*20 = Rs.15,000. This 15,000 gets reduced from your actual balance of Rs.1,20,000 and you’d be left with 1,05,000. You would have to bring in additional fund to carry forward your position or square off a few lots. Writing options has been explained in detail on Zerodha Varsity here: http://zerodha.com/varsity/chapter/sellingwriting-a-call-option/

Please note that my call writing option has been rejected by my brokerage when i made the writing for the value of Rs. 11,250 by selling 10 lots @Rs.15 in nifty jan 2017 series. But your explanation is different from that of happened.

They are telling that to my investment value of Rs. 1,20,000/- i can write only 3 lots. Please explain?

If so by iam writing only 3 lots then how much profit i could earn? Pls explain?

Hello Sir,
Eg: If I short a Call at Rs 10 for 1 lot (750/- premium received )at strike price 8000 and on expiry it reaches at Rs 2 with 7900 as strike price . I do not square off the position . So will I get to keep the entire Premium amount of Rs 750 or will it be auto squared off at Rs. 2 on expiry ?